Investment Engineering

How much should governments and companies participate in the practice of investment engineering?


I wrote a blog post about having more options and making more decisions in our 401K plan.  One criticism of that idea is that people might make the wrong decisions and destroy their investment portfolio.


A company or government that purposefully restricts our ability to make investment decisions is engaging in a form of investment engineering. 


Governments engage in social engineering all the time.  Millions of decisions are made on a national level that influence the course of history.  I agree that it is a good idea to warn people about the dangers of smoking.


I also understand that there are people who will trash their investment portfolio.  I just don't agree with putting limitations on everyone.  There should be some sort of red flags that go up if your portfolio loses more than the average portfolio.  Have the HR person or an investment advisor look at the 401K activity and provide steps for being a better investor.


Here's an example of the type of investment engineering I agree with.  The Obama Administration knows that we need individuals to save for their own retirements.  The old pension systems are gone and Social Security can't be the primary savings plan for retirement.  The problem is that not many people were opening individual retirement accounts and few people were fully participating in 401K plans.


The investment engineering happened when the Obama Adminstration introduced a plan to have all employees automatically enrolled in a company 401K plan.  In the past, employees would have to take steps to open a 401K account.  Now, they only have to take steps if they want to reduce or cancel their monthly investment. 


I'm not sure what the auto-enroll contribution rate is.  That would be a tough decision to make.  The government probably wants it set at the highest rate possible, but a large chunck of salary missing from that first paycheck might lead people to cancel the 401K plan. 


I wonder if companies would want the government to establish a auto-enroll contribution that was within the range of the company matching funds.  I wonder if there is pressure from corporate lobbyists to have the auto-enroll contribution limit set just below the point where matching funds would kick in?


Anyway, I just thought it was interesting that there are examples of investment engineering taking place.


Can you think of any other examples of investment engineering?

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