Soon, 401(k) investors came not to praise portfolio optimization, but to bury it. And with that internment, covered with the dirt of asset allocation, they lost the original common sense philosophy behind the purpose of the mutual fund: to create a single diversified portfolio for those with too few assets to construct such a portfolio for themselves. With this innocence lost, mutual funds first devolved into mere slices of the asset allocation pie then into the square blocks of the style box.

Mutual fund options blossomed like weeds within individual 401(k) plans. No longer did employees have a clear (if not ideal) choice between stocks, bonds and cash or (a bit better) a choice between conservative growth, aggressive growth or stable value. No. There choices now ranged the complete panoply of market capitalizations, industry sectors and duration periods. And that was when things were simple.

Soon, the rocket scientists of Wall Street devised mutual fund products to cover all sorts of securities classes. It's gotten to the point where average 401(k) investors now need full-time financial professionals to them through the jargon-laden maze of their 401(k) menu options.

Alas, what was billed as the freedom of choice became nothing more than the burden of mediocrity, as employees increasingly sought to diversify among already diversified investments. In the end, they merely created a personal high-cost index fund. Worse, more and more 401(k) menu options rejected the traditional one-size-fits-most mutual funds and replaced them with one-size-fits-none funds that all but guaranteed investors would suffer from over-diversification.

Eventually, academic studies, having left the simple paradise of portfolio optimization, turned to answering the question "How Many Investment Options Should 401(k) Plan Sponsors Offer?" While studies revealed empirical evidence that too much choice was actually bad for 401(k) plan participants, all but the bravest plan sponsors dare break from the "freedom of choice" mantra.

Indeed, at its worse, plan sponsors began offering complete broker platforms, where 401(k) investors had their pick from a cornucopia of thousands of mutual fund options.

No more. The DOL has exposed the fiduciary folly of this as an abdication of the plan sponsor's fiduciary duty. On May 7, 2012, in question 30 of its "Field Assistance Bulletin No. 2012-02," the DOL states quite plainly, "Unless participants and beneficiaries are financially sophisticated, many of them may need guidance when choosing their own investments from among a large number of alternatives."

The DOL further states, "Paragraph (h)(4) of the regulation specifies that a brokerage window or similar arrangement is not a 'designated investment alternative.' A platform consisting of multiple investment alternatives would not itself be a designated investment alternative."

So, what's this upper limit number which triggers this increased DOL scrutiny? Granted, this is in no way a definitive upper bound, but, according to this release, a plan using a platform with more than 25 options would begin to have to jump through hoops. 

One can almost feel the goo of fiduciary liability rising among the many 401(k) plans with dozens of options.