A PBS documentary airing on Frontline Tuesday, called The Retirement Gamble, says most 401(k) programs are “lousy.” The program, written and produced by Martin Smith, shows numerous people worried about their various states of retirement saving. Many of the experts interviewed say 401(k)s are a favorable choice for the industry, including brokers who sell them as middlemen. However, they say they are no longer advantageous for the people who actually use them, citing excessive fees and lack of clear guidance amongst other things.
For those in the industry, the retirement problem is well known. Just last month EBA reported on the Employee Benefit Research Institute’s retirement confidence survey, which found that 28% of respondents — the highest level in the survey’s history — are not at all confident about being able to afford a comfortable retirement. Smith has similar numbers, saying half of all Americans say they can’t afford to save for retirement and one third have next to no savings at all.
"What happens in the fund business is the magic of compound returns is overwhelmed by the tyranny of compounding costs,” John Bogle, founder of The Vanguard Group, tells Smith. ”It's a mathematical fact — there's no getting around it. Why we don't look at it, too bad for us." Smith then looks at his own 401(k) for these costs and finds “all sorts of products with different kinds of fees.” He says broker fees are buried within as well.
“There’s nothing against the law about it,” says Jason Zweig, an investing columnist for The Wall Street Journal, referring to brokers in the piece. “But it is a sort of a ‘you scratch my back and I’ll scratch yours,’ kind of arrangement.’ If you sell our funds, you’ll get a portion of the revenue we earn, through selling them through you.”
The solution Smith and his documentary team seem to suggest is that index funds are a much safer investment for most people looking to save for retirement. Bogel agrees: “Then you’re the creature of the market, not of the casino.”
The industry group ASPPA reacted in opposition to the documentary this morning. “What is more troubling, however, is Frontline’s take that fees are by far the most important factor to be considered when choosing an investment, and the retirement industry offers participants little value. In other words, that the industry is nothing more than a commodity,” says Brian H. Graff, executive director and CEO of The American Society of Pension Professionals and Actuaries.
The documentary also mentions the pending decision by the Department of Labor to extend fiduciary liability to all financial planners. Smith points out that 85% of advisers are not current fiduciaries. EBA reported earlier this month on a GAO report that showed fiduciary liability may halt conversation by many advisers due to increased regulation.
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