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401k Fiduciary Risk is Risky Business
by Christopher Carosa, April 08, 2025
The 401k fiduciary risk trouble starts with a spooked saver. The glare of the screen reflects off the 401k participant’s face. Staring down a market freefall, palms sweaty, heart racing—volatility’s got him agitated, and that little risk tolerance questionnaire he filled out? It’s about as useful as a paper umbrella in a hurricane.
Fiduciaries, you’re on the hook—not just to dodge ERISA lightning bolts, but to guide these folks through the retirement red zone without them “going broke safely.” Risk tolerance tools have been the industry’s go-to for decades, yet they’re a rickety bridge over a chasm of disconnect between what participants feel and what the pros measure. This isn’t just a glitch; it’s a full-blown fiduciary fiasco, (see “Should 401k Plan Sponsors Ban Risk Tolerance Questionnaires?” FiduciaryNews.com, August 13, 2013). Why are these questionnaires trouble for 401k fiduciaries? More important, can fiduciaries replace them with something that actually works?
The 2007-2009 market crash wasn’t just a wake-up call—it was a siren blaring that risk tolerance questionnaires were failing the suitability test, let alone the fiduciary bar. A 1999 study in the Journal of Financial Planning (http://ssrn.com/abstract=1860403) had already waved the red flag, showing these tools misfire by boiling risk down to a single number, muddling advisor-client chats. Yet, they’re still plastered across 401k enrollment kits like a bad habit nobody can kick. Why? They’re cheap, easy, and baked into regulatory frameworks like FINRA’s rules 2090 and 2111.
For fiduciaries, though, “easy” doesn’t cut it—ERISA demands the best for participants, not a one-size-fits-all Band-Aid.
So, how do advisers even use these things to size up a participant’s risk and return goals? The industry leans hard on them, especially in 401k plans where time’s tight and deep dives are rare.
“Risk questionnaires are the primary tool used to assess risk and return objectives in the industry, particularly for participants in retirement plans where in-depth discussions and/or financial planning are not practical,” says Jeff Coons, chief risk officer at High Probability Advisors in Pittsford, New York.”
That’s the 401k fiduciary risk trouble—speed over substance. It’s a quick snapshot—check some boxes, tally the points, and voilà, you’ve got a model portfolio. But quick doesn’t mean right, and fiduciaries know that snapshot can blur the bigger picture participants need to see.
Here’s where the plot thickens: Advisers, try blending those questionnaires with something meatier. Sure, they’re not flying blind. Some mix data crunching and heart-to-hearts for a more robust picture.
“Advisers typically assess a client’s risk and return objectives through a combination of questionnaires, in-depth conversations, and data analysis,” says Richard Bavetz, investment advisor at Carington Financial in Westlake Village, California. “These tools help uncover the investor’s stated preferences and emotional tolerance for market volatility and long-term financial goals. We look for three aspects of risk tolerance: Capacity, Disposition, and whether the client’s expectations are realistic. Experienced advisers lean heavily on personal judgment while staying open to the client’s beliefs about the market… asking follow-up questions to dig deeper. The aim is to balance what clients say they want with what is possible to achieve based on their stated goals and financial picture.”
For 401k fiduciaries, this hybrid approach hints at a lifeline—questionnaires as a starting line, not the finish—but it’s still a tightrope walk over a suitability swamp when ERISA demands more.
Here’s where the real disconnect kicks in: participants and pros don’t speak the same language on risk. Participants “feel” it—gut punches from 2008 or a parent’s market woes still sting, skewing their answers. Meanwhile, advisers whip out rulers like standard deviation or some index, measuring volatility in neat little boxes.
“Investors ‘feel’ risk,” says Ron Surz, president of Target Date Solutions in San Clemente, California. “Academics and professionals measure it as volatility and the VIX. In order to elicit a risk decision from investors, professionals use questionnaires that behavioral scientists criticize. Intuiting risk is an art.”
That art’s lost on a 401k participant ticking boxes, leaving fiduciaries with a Picasso of emotions and a spreadsheet that don’t match. The gap’s not just a vibe—it’s a chasm between math and meaning. Pros love their models, but participants want to know if they’ll sleep at night when the Dow tanks.
“The disconnect comes down to perspective—academics and professionals often define risk in mathematical terms, like standard deviation or beta, which measure volatility and how much an investment deviates from its expected return,” says Bavetz. “On the other hand, investors tend to see risk more emotionally, often as the possibility of losing money or not reaching their personal goals. While the academic view focuses on probabilities and models, most investors want to know, ‘Will I be okay if the market drops?’ Comparing Capacity vs. Disposition will tell us. ‘Will I be OK financially (Capacity)?’ is not the same as ‘Will I be OK emotionally (Disposition).’ Bridging this gap requires advisers to translate complex risk metrics into real-life outcomes that clients can understand and relate to.”
Media hype fuels 401k fiduciary risk trouble. Fiduciaries can’t just shrug—this mismatch can derail a participant’s retirement, and ERISA’s watching. Time’s the wild card that flips the script. Volatility’s a short-term squall, but retirement’s a 30-year voyage. Failing to grow beats losing a few bucks today.
“The academic definitions of risk revolve around volatility, which are the short-term swings in market values,” says Coons. “However, a better definition of risk fostered by some industry professionals is a failure to achieve objectives over the client’s investment time horizon, which may come from sustained loss in portfolio value, inflation overwhelming portfolio growth, or even the opportunity cost of failing to match long-term needs with long-term investments. In all cases, time horizon is an important part of both setting client objectives and measuring risk.”
For 401k stewards, this yells “overhaul!” Questionnaires stuck on “how risky do you feel?” miss the real question: “will your nest egg last?” Time to trade the crystal ball for a compass.
So, how do we crack this nut? Academics have tossed out ideas like “Lifetime Investment Paths,” blending current cash with future earning power, but the industry’s still hooked on risky target date funds.
“Academics have addressed this issue with ‘Lifetime Investment Paths’ that integrate financial capital (current money) with human capital (future money—earning power),” says Surz. “This research is the basis for target date fund glidepaths, but most TDFs are much riskier at the target date than theory—they do NOT defend against Sequence of Return Risk. Practice differs from Theory even though practitioners say they follow the Theory. Risk is more profitable than safety.”
Fiduciaries, take note. Those TDFs tied to questionnaires might be a cash cow for providers, leaving savers high and dry. Does that sound like a fiduciary win to you?
Splitting the risk baby could be the ticket. Capacity versus tolerance is two sides of the same coin. Only one matters more than the other. One is the rubber that meets the road. The other is the frothy nothing.
“The best way to improve risk definitions and set objectives is to separate ‘capacity for risk’ from ‘tolerance for risk,’ says Coons. “Capacity for risk is inherently about assessing the ability to withstand losses over a client’s investment time frame given the needs they are covering with those assets. Tolerance for risk is how the client may handle interim volatility. Both are important to assess when setting up an investment program.”
This dual lens could ground 401k plans in reality. Fiduciaries could help retirement savers dodge the emotional quicksand while keeping their eyes on the prize. It’s this human touch that seals the deal. Advisers need to meet participants where they’re at, not where the math says they should be.
“To resolve the disconnect, advisers must meet clients where they are, often with unrealistic ideas of how markets perform,” says Bavetz. “I have found that Media hype can give investors inflated market performance expectations. This hype can also create the Fear of Missing Out (FOMO), which can lure conservative and moderate investors into inappropriately riskier investments. Testing a client’s market knowledge is a useful technique for flushing out this disconnect and revealing the client’s genuine beliefs. Prompting clients to guess what they think the S&P 500 average rate of return has been since its inception, for example, has proven to be very effective at gauging whether the client’s expectations are realistic or over-inflated. Rather than relying solely on charts or jargon, an advisor can frame risk in terms of potential loss outcomes, like how a portfolio might behave during a downturn. Visual tools, storytelling, and real-world scenarios help make abstract concepts feel more tangible. Ultimately, it’s about aligning the portfolio with the client’s lived experience and goals but also resetting their expectations to reflect realistic outcomes.”
For 401k fiduciaries, this means ditching the questionnaire crutch—pairing it with advisers who can translate, educate, and reset.
Risky business? You bet. With 74% of workers fretting over volatility (according to the 2023 EBRI survey), and 41% risking shortfall by dodging equities (2024 EBRI model), 401k fiduciaries can’t coast on outdated quizzes. That’s the 401k fiduciary risk trouble in a nutshell. Push for advisor access, split capacity from tolerance, and frame risk in real terms. Participants don’t need a quiz; they need a lifeline.