On April 23, PBS Frontline aired The Retirement Gamble. In it, Frontline correspondent Martin Smith took a comprehensive look at the state of the financial services industry and it’s failure to help Americans effectively save for retirement. I suspect for many viewers, this look “under the hood” of the industry was eye-opening. For me, it was the best attempt at explaining the problems of the industry I have seen. Here are a few of the highlights:
In 1970, 42% of American employees has a pension plan that guaranteed a monthly income stream for life at retirement. It was simple, and individuals were not responsible for designing their own savings plan. Fast forward 40 years, and now 60 million Americans are enrolled in their employer’s 401k plan. These individuals are confused and don’t understand how the plan works. The investment options have misleading names such as; Growth Fund or Balanced Fund. Now Americans have to do their own savings and investing, which used to be done for them.
“Nobody was managing my money, it was up to me.” – 401k participant
“The 401k is the only product Americans buy that they don’t know the price of it” – Professor Teresa Ghilarducci
The switch from traditional pension plans to 401k plans happened during the long bull market in the late 1980’s and 1990’s. No one questioned the fees charged in the plans because performance was good. The entire financial services industry was advertising that all individuals could make money buying their mutual funds. This proved to be a myth when the market fell after the tech boom in the early 2000’s and then again during the 2008 financial crisis.
“Everyone can do well in the stock market. You have the skills. You have the intelligence. It doesn’t require any education. All you have to have is patience and do a little research and you’ve got it.” – Fidelity Fund Manager Peter Lynch
Fees in 401k plans and other financial products are high, and most Americans are unaware of what they’re paying and the effect on the value of their account. Vanguard Group founder Jack Bogle explains that over 50 years, an investment in a mutual fund earning 7% per year on average with a fee of 2%, will lose over 2/3rds of its value to fees. When Frontline correspondent Martin Smith confronts a JP Morgan retirement executive with this math, he looks dumbfounded and doesn’t know how to answer the question. It’s likely the JP Morgan executive has never seen a calculation on the impact of fees. His livelihood depends on those fees, so ignorance is bliss. Martin Smith later confirms Bogle’s claim by running his own calculation on a compounding calculator.
“What happens in the (mutual) fund business is the magic of compounding returns is overwhelmed by the tyranny of compounding costs. It’s a mathematical fact.” – Jack Bogle Founder of Vanguard
The evidence is overwhelming that actively managed mutual funds fail to beat simple index strategies. Over both bull and bear markets, as a whole, actively managed funds underperform. Yet, the mutual fund industry is in denial, and the Head of Retirement at Prudential even claims to be unaware of the research on passive versus active funds.
“There’s no scientific evidence that mutual funds outperform a simple strategy of holding the market index.” – Zvi Bodie Economist at Boston University
“One of the ultimate dirty secrets of the fund industry is that a lot of people who run other fund companies own index mutual funds in their own accounts and don’t talk about it.” – Jason Zweig of the Wall Street Journal
The vast majority (over 85%) of financial advisors are not held to a fiduciary standard. A fiduciary standard is a legal obligation to put your interests first, ahead of the interests of the advisor and the firm. Instead, these salesmen fall under a suitability standard, which means they cannot sell you any one product that is completely unsuitable for you. The Department of Labor recently pushed new regulations to make all advisors to individual investors accept the fiduciary standard. The financial services industry lobbied hard against it and won. Martin Smith recommends you ask any financial advisor to sign a fiduciary statement before entering into a relationship with them.
These are merely the highlights of PBS Frontline’s The Retirement Gamble. I highly recommend you watch it yourself. The link is available on PBS’s website.
Watch PBS Frontline – The Retirement Gamble by clicking here.
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