Martin Smith
If you’ve been watching any commercial television lately, you are well aware that the financial services industry is very busy running expensive ads imploring us to worry about our retirement futures. Open a new account today, they say.
They are not wrong that we should be doing something: America is facing a retirement crisis. One in three Americans has no retirement savings at all. One in two reports that they can’t save enough. On top of that, we are living longer, and health care costs, as we all know, are increasing.
But, as I found when investigating the retirement planning and mutual funds industries in
The Retirement Gamble, which airs tonight on FRONTLINE, those advertisements are imploring us to start saving for one simple reason. Retirement is big business — and very profitable. It doesn’t take a genius to figure out that the more we save into the industry’s financial products, the more money they make in fees and commissions trading our hard-earned cash. And as long as they don’t run away with our money or invest it in a Ponzi scheme, they have little in the way of accountability to us when something goes wrong. And even then it can be hard to fight back.
Big banks, brokerages, insurance companies and other financial service providers operate under something called a suitability standard — which says they don’t have to give you the best advice, just advice that isn’t too egregiously terrible.
Let’s say you sit down with an adviser at your brokerage or bank and ask for some advice on how you should allocate your retirement savings, or which funds you might want to choose for your IRA.
You’ll get lots of advice, but chances are it won’t be worth much. Eighty five percent of all financial advisers and financial planners are really just brokers or salesman. Their incentive is to sell you a product that makes them a higher commission, not necessarily a product that maximizes your chances of saving more. Only 15 percent of advisers are “fiduciaries” — advisers who by law must operate with your best interests in mind.
Last year, the Obama administration proposed a rule to mandate that all financial advisers, financial planners and other assorted financial wizards would have to adopt a fiduciary standard when it came to employee retirement accounts such as your 401(k) or IRA account. The financial services industry, which today manages something upwards of $10 trillion of our retirement nest eggs, thought this was a bad idea and pushed back hard. Scores of their protest letters poured into the U.S. Labor Department, the branch of our government responsible for regulating employee retirement accounts.
“As long as they don’t run away with our money or invest it in a Ponzi scheme, they have little in the way of accountability to us when something goes wrong. And even then it can be hard to fight back.”
Congress, too, was hit with a furious lobbying campaign. This would be way too expensive, the industry said; if we have to provide such a standard of service, we will either have to pack up and find another business line, or have to pass the increased costs on to our customers. The Obama administration pulled their proposal last fall.
How would a new fiduciary rule change things? Chances are you would be sold less expensive products, not only in your IRA accounts but inside your company 401(k) as well. It’s all about fees. While reporting on retirement plans for FRONTLINE, nothing has been more surprising to me than the corrosive effect of fees on our retirement savings.
It’s this simple: Fund fees can erode as much as half or more of your prospective gains.
For the sake of dramatizing the point, John Bogle, founder of Vanguard, the world’s largest mutual fund company and pioneer of low-cost index funds, gave me a startling example while we were filming. Assume you are invested in a mutual fund, he says, with a gross return of 7 percent, but that the mutual fund charges you an annual fee of 2 percent.
Over a 50-year investing lifetime, that little 2 percent fee will erode 63 percent of what you would have had. As Bogle puts it, “the tyranny of compounding costs” is overwhelming.
In short, fees matter. So what can you do? You aren’t going to find a fund that invests your money for free, but experts say you can come close by buying index funds. Their fees can be a tenth of what the average mutual funds charges. And over time, in bull and bear markets, on average, index funds perform better than their more expensive actively managed fund cousins. This is no secret to anyone who is paying attention.
So why aren’t our trusted financial advisers and those ads telling us to buy index funds? Why do some 401(k) plans not even offer them on their menus?
It’s because even though an index fund might be a better option for you and me, a broker operating under a suitability standard has no incentive to sell it to us. He or she will make higher commissions from options that have higher fees.
Sadly, a recent AARP study reported that 70 percent of mutual fund savers were not even aware that they were paying any fees at all.
Is there hope for change? The Labor Department says they plan to reintroduce a new fiduciary rule this summer that will force the financial services industry to think of us first when it comes to retirement. We’ll see how that goes.
In the meantime,
The Retirement Gamble airs tonight (
check your local listings here). What I uncovered while making this documentary made me rethink my financial future. It just might do the same for you.
What to Ask About Your Retirement
So you’re concerned about your financial future and ready to do something about it. But where do you start? We asked three experts what questions they would ask their employers, financial planners, plan providers and themselves to help save the most for retirement. Here’s what they had to say:
Jason Zweig is a personal finance columnist for
The Wall Street Journal and the author of the book,
Your Money and Your Brain.
Ron Lieber is the author of the “Your Money” column for
The New York Times.
Helaine Olen is the author of
Pound Foolish: Exposing the Dark Side of the Personal Finance Industry.
General Planning
Am I saving as much as possible?
Virtually everyone should save up to the maximum available ($17,500 or, generally, 15% of eligible pay). If you feel you can’t save the maximum right away, sign up for an “automatic escalation plan” to raise your contributions down the road. And once you turn 50, be sure to save an additional $5,500 in “catch-up contributions” annually. -Jason Zweig
How much do I really need to save?
Studies show that most of us think the correct amount we need to save for retirement is whatever amount from our salary our employer automatically defaults into a defined contribution plan. This is highly unlikely to be true, unless you have the rare employer who has set the employee default at 10 percent or higher. Find out what the amount is, and supplement if you think you can afford to do so. -Helaine Olen
Are cheaper choices available?
Before you invest in any retirement fund, make sure one of the other choices on the menu isn’t cheaper. When it comes to investing, you don’t get what you pay for: The higher a fund’s fees, the worse its return is likely to be over time. -Zweig
How do you know that?
Often, the people giving advice about retirement investing seem highly confident about what they’re saying even though they have no evidence that it’s true. This simple question can help you separate the experts from the pretenders. -Zweig
On Target-Date Funds
What is in a target-date fund?
Many 401(k) plans favor so-called “target-date funds,” which combine stock, bond and other funds into a single bucket. Some of these funds contain risky, obscure, expensive assets. If you can’t understand the fund or no one can explain it to you, put your 401(k) savings into a different fund or funds. -Zweig
Is a target-date fund for me?
First, target date funds operate by assuming you don’t have outside investments. If you have a sizable portfolio outside your employer’s 401(k) account, a target-date fund might not be the right choice for you. Second, fees on this type of investment can be quite high, often because the companies offering them simply stuff them with their own funds. Third, a target is just a target. It’s not a guarantee. -Olen
Which target-date fund should I choose?
The asset allocation for your age may not reflect your tolerance for risk. So just because you’re 25 years from retirement doesn’t mean you should pick the 2035 or 2040 fund. You may want the 2020 fund if you’re more conservative, or the 2050 fund if you want more stock exposure. And different fund families have different philosophies on what a 40-year-old should be invested in. So you need to check under the hood carefully if you’re going to put all of your money in one of these funds. -Ron Lieber
On 401(k)s
Is my 401(k) investment safe?
There is a lot of conspiracy theory talk out there right now that the government plans to – at some distant point in the future – confiscate 401(k) savings to plug holes in the federal deficit. This is absolute hooey. Don’t let this stuff scare you out of placing money in your 401(k). -Olen
I’m leaving my job. What should I do with my 401(k)?
As high as the fees can be on funds inside a 401(k), they can be worse for Individual Retirement Accounts. Don’t assume you will be getting the best advice from those offering advice via your company’s plan administrator. A recent Government Accountability Office study discovered that all-too-many advice givers for the plans pushed exiting employees into their own proprietary financial products, instead of counseling them to either leave the money in place or roll it over to their new employer’s retirement plan. -Olen
The Fine Print
How much does my plan cost? What kills returns the most is plans with very high fees. Unfortunately, the vast majority of participants have no idea how high their fees are in comparison to other similar plans. If you work for a relatively big organization, you can look up your plan on
Brightscope.com and see how it rates on fees.
If you work for a smaller company or a non-profit, you should assume that your fees are very high, especially if an insurance company or payroll services provider (or anyone other than Fidelity, Schwab, Vanguard or T. Rowe Price) is administering your 401(k) or 403(b) plan. Try to figure out who at your employer controls the plan and engage them in discussion about lowering the fees. Remember, this person is not your enemy — they are saving in the plan too, and want better performance for themselves. But this person may not be an expert. In fact, this person may know less than you about how this all works. -Lieber
Am I diversified?
Don’t invest in your own company’s stock. You’re taking enough risk on its future just by working there. Make sure you always spread your money across U.S. and international stocks, small and large, with some bonds for ballast. Don’t put all your eggs in one basket. -Zweig
Is there a full collection of low-cost index funds?
Many mutual funds are very expensive, often because the managers are trying to beat the market index in whatever category the investments are in. Most research suggests that people are better off in index funds, in part because the fees are always so much lower.
Your retirement plan administrator may resist the move to an all-index retirement plan because mutual fund companies often help pay for your employer’s administrative costs of running your plan by refunding some of the fees on those actively managed funds. But in the very least, you should have a full menu of index funds in every major investment category. You should also have the option of investing in target-date funds that are made upentirely of index funds. -Lieber
Will you auto-escalate me each year?
You should have the option of opting yourself into better behavior, that is, boosting the percentage of your salary that you save in your retirement plan. Ideally, you’d increase your savings by one percentage point (not 1 percent, an important difference!) each time you get a raise. Most the 401(k) companies now offer auto-escalation to the employer, but your company needs to choose to offer it as an option to employees. -Lieber
Will you automatically rebalance me?
You should also have the option of setting an ideal allocation of your investments (70 percent in one fund, 30 percent in the other, say) and then having the plan automatically rebalance it when it gets more than five percentage points out of whack in any one direction. That way, you don’t have to remember to do it yourself. Many plans do not yet offer this as an option. But they should. Ask for it. -Lieber
Should I attend that retirement seminar?
Whatever you do in this life, please do not say yes to offers of a free meal in return for hearing financial information. The vast majority of these seminars are designed to appeal to seniors by referencing such hot button issues as Social Security or retirement insecurity. The financial sales people hosting the event then offer as a “solution” whatever product they are pitching. The best way to not fall for it is not to show up. -Olen
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Wednesday April 24, 2013
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