I get a lot of questions these days about my opinion of the recent PBS episode of Frontline called "The Retirement Gamble." The program details America's retirement crisis, highlighting some of the facts that I have written about in this column, including: one in three Americans has no retirement savings at all; one in two say that they can't save enough; and the demographics of an aging population are making matters worse. But the documentary goes one step further in pointing a finger directly at the financial services industry. Frontline accuses major financial companies of feasting on high fees inside of many employer-sponsored plans, pushing retirees into products that may be "suitable" but not in their best interests, and providing murky disclosures about the funds and annuities that they urge the public to buy.
The roots of the "Retirement Gamble" were planted in the early 1980s when 401(k) plans were first introduced. At that time, American workers were mostly covered by company-provided pension plans, and the new fangled 401(k) was designed to supplement pensions, not replace them. But companies soon seized the opportunity to reduce costs and dumped the long-term liability of employee pensions. Within a few years, the 401(k) became the go-to retirement vehicle.
At the time, few people saw the advent of the new plans as a massive risk transfer from corporations to employees, but that's exactly what happened. After all, corporate America was not about to tell workers, "Hey, instead of your boss paying into a guaranteed retirement plan, the risk of making contributions and managing your retirement money is entirely on you!!"
It has taken everyone a long time to wake up to this fact because of market timing: 401(k)s took hold at the beginning of the biggest bull market in history for stocks and bonds. Even as markets hiccupped every now and then from 1982-2007, they often rebounded quickly, masking the larger risks that plan participants were bearing and generally diminishing people's respect for investment prudence.
Flash forward to the present, where countless retirees and would-be retirees have discovered those risks up close and who are trying to rescue their now-depleted retirement accounts.
In the past, I would have taken a moment like this to extol the virtues of financial literacy. But my opinion on that front has shifted after interviewingHelaine Olen, author of "Pound Foolish: Exposing the Dark Side of the Personal Finance Industry." Olen notes that financial literacy really does not help change the basic facts: Some of the best-educated people still make lousy financial choices, and "sometimes bad financial events can happen to us."
One of the problems with literacy efforts is that they are often financed by big financial institutions, whose motives may be suspect. Many of these big companies promote their public education projects, while they continue to sell murky, complicated products at the same time.
The industry is not just fooling investors -- in some cases, it is fooling itself. When Frontline asked Michael Falcon, the head of retirement for J.P. Morgan Asset Management, about the negative impact that mutual fund fees have on investors' returns and whether putting clients' interests first is a better model, he seemed to be at a loss for any reasonable response.
But the most cringe-worthy part of the program goes to Christine Marcks, the head of Prudential Retirement. When Frontline correspondent Martin Smithasked Marcks about the evidence that most actively managed mutual funds fail to beat index funds, her response was, "Yeah, I haven't seen any research that substantiates that. I mean it -- I don't know whether it's true or not. I honestly have not seen any research that substantiates that."
That is an astounding response. Marcks could have evaded the question and said that actively managed funds might beat the indexes from time to time, which is why retirement plan investment consultants exist -- to find the best funds available. But to insist that she hadn't seen any research is simply not plausible. In that one response, she became the poster child for what's wrong with the industry and why everyone should watch "The Retirement Gamble."
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