PBS’s Frontline ran an investigative piece on our looming retirement crisis recently titled The Retirement Gamble. The video, which is causing a stir with retirees and advisors alike, rehashed some well known issues with the costs of retirement saving, but more importantly showed the lack of solutions that so called retirement “experts” have to offer.
I use the word “expert” loosely, as most have little experience in the business, or in any for-profit business at all. Some are writers that benefit from repeating old issues with a new spit, but few had anything new to offer. Those true retirement experts that I have great respect for like Jason Zweig of the Wall Street Journal were not discussing the most important issues, such as Zweig’s expertise in the field of investor behavior, which may be the most critical part of why some retirees fail when others succeed. Instead, the piece wallowed in negativity in misguided attacks on products and companies, while ignoring the vast good the same have done.
As a professional that has worked in the retirement planning field with retirees for over a decade, I was alarmed to find all it appears one has to do to be a retirement expert is to criticize those who actually are working experts at helping individuals approach the awesome responsibility of becoming self-sufficient. And, while the goal of all individuals is self-sufficiency, the experts opinions seem to be that we needed less of it, and more government mandates.
Take Robert Hiltonsmith, a fairly young and relatively recent graduate who works as an economist for a left-wing think tank, and became an instant retirement expert in 2012 when he rehashed past criticisms of the fees associated with 401(k) plans. While there is much criticism of fees and unhelpful prospectus documents, there is no mention of the reason for those documents and fees being past intervention. In the documentary Mr. Hiltonsmith says saving 10% of one’s income for retirement is too much, and yet having his wages reduced by 12.4% to pay for a safety net in social security must be rational. I have written in the past about his harmful solutions to make individuals more reliant on government managed investment plans, because social security, municipal pensions, and 529 plans are apparently run well, without conflict, and without cost. The facts in this expert’s opinion speak to the contrary.
Or, take writer Helaine Olen who in her book Pound Foolish: Exposing the Dark Side of the Personal Finance Industry repeats every criticism every told of the industry (including how wealthy personal finance personalities that help millions of people don’t invest like the rest of us… to think!). A review of her book offered the following:
1) My overarching feeling as I read the book, was that Olen was complaining about many things but not offering any solutions. Many other reviewers had similar thoughts….
2) The political undertones were not needed or helpful. It appears that Olen wants more regulation….The cost of more regulation usually gets passed on to the consumer. Olen’s advice is also very general. No specific recommendations are offered. Perhaps it will be in Olen’s next book.
3) The language in the final chapter was also not necessary. I am not offended by bad language but I thought it was so out of place.
4) The final conclusion that government should do more was a big disappointment. Surely financial success is not going to occur because the government does more for us. If managing finances is not the area where we need to take some personal responsibility then what is?
Not one expert offers a concrete solution to what is so clearly an issue where consumers can and should make better decisions. Instead of focusing on why consumers make the decisions they do, they turn to government to provide their solutions by force. And yet, history has shown this to be a rather poor way to achieve one’s ends.
Within the last decade these same financial “experts” have taken on many causes in order to save the average investor. Very recently, they attacked managed investment accounts offered by brokers. Their claim was that brokers wear different hats and that these accounts harmed investors since a broker’s job is to make a sale, not manage assets. This claim is very similar to the film’s assertion that investors need new laws to make everyone a “fiduciary.” The government fix on managed accounts didn’t phase investors one bit, investors stayed with their brokers and probably did not even notice new disclosures, though experts with their own agendas created a whole lot of hoopla to achieve nothing. The new disclaimers, paperwork, and costs to the investor are not ever discussed as an outcome in the above, or in calls for more regulations. What was the result of this and other interventions? As opposed to working with more clients at lower balances in their wealth management, many brokerage firms have stopped serving clients below certain balances, and imposed new fees in order to simply hold such accounts.
The experts also are fairly selective in their attacks, focusing on the negative, and ignoring the great wealth that has been created in allowing investors to have control over their money. Ron Lieber of the New York Times discusses the mutual fund industry as the force behind the retirement issues of today. Mutual funds were behind the push away from pensions, and towards high cost investment vehicles in the 80’s and 90’s 401(k) plans, according to this take on history. Failed to be mentioned was that as late as 1993 that mutual funds were actually only 15% of 401(k) assets according to the Investment Company Institute, or that costs declined substantially to invest in them, or that many 401(k)s have lower cost investments than investors can purchase on their own. All of which benefited the consumer by lowering the costs to invest in the stock market, when commissions were not $9.95 per trade. The industry continues to lower costs and barriers to their products, and today the average Joe with $100 can invest in products that required minimums of $1,000,000 not 10 years ago. Sound like a particularly evil industry?
Other experts placed the blame on the costs of actively managed mutual funds. As much as I agree with the philosophy of investing passively, I see no benefit to discussing their benefits while ignoring the reasons why an employer or any consumer chooses the product they do. I also did not find it honest journalism to quote as your reasoning for attacking active management a group that sells passive investments.
Since they do not deal with why, the experts in this piece will keep spinning in their tracks, fighting a new battle, and complaining about the new costs passed onto them, ignoring the fact they came from past mandates their predecessors imposed. As taught in my and many Econ 101 course, the bad economist is always ignoring the unseen impacts of their actions.
Mr. Lieber for example doesn’t explain that the fees for most fiduciary advisors are out of reach for the average investor. The number used in the documentary that an average employee pays is $155,000 over their lifetime. A fiduciary advisor who writes for Mr. Lieber’s New York Times blog offers an investment management service (investment management only, which to my mind places the cart before the horse of financial planning) requires a minimum of $5,000 annually, and those fees are not inclusive of the mutual funds those advisors recommend, or the fees custodians charge to hold those funds. $5,000 times 65 years of saving and investing is quite a bit more than the service 401(k)’s provide, and far many more benefit from that service.
The retirement crisis, the real one, is not about fiduciaries, fees, funds, or investing beliefs. It is about coming back to self-reliance after a time where current retirees relied on a company. I often think many don’t look back far enough to understand the reason we have the system we do is an unintended consequence of prior interventions. For centuries prior to the company pension (which only came about due to government controls on wages), individuals were self-reliant. There was no outcry for social security in the 1930’s. Few collected. Today, we are all reliant on it for some reason. Safety nets have that unintended outcome that bad economists often ignore; they too often become relied upon far more than they were meant to.
The new retirement conversation should include scenarios of clients that did things right. A recent client of mine is around Mr. Hiltonsmith’s age at 32. Like others in the piece, he is a single school teacher, and one of four children of a minister and public service worker, he didn’t receive significant support for where he is today. He does not have a masters degree or a PhD, though he would like to go back to school for an advanced degree. Working on a school teacher’s salary last year he maxed out his 403(b) at $17,500 per year, his Roth IRA at $5,500 per year, with self-employment income he saved another $2,000 to a SEP IRA, and he increased discretionary contributions to his teacher’s pension and retirement health care. In addition to having a minor amount of student loan debt, a mortgage that could be paid off within 10 years if he chose, he also adds to an emergency savings account on a regular basis. All of this is done on a public school teacher’s salary. He has so far saved more than many in their 40′s and 50′s, and has spent enough time to understand enough about investing and markets to not be taken advantage of.
It is time to stop the focus on protecting everyone from fees they can manage with education, and discuss why individuals like my client are able to do more with less opportunities than his parents had. The time has come for developing real solutions as opposed to simply being negative and finding ways to mandate more ineffective outcomes through the blunt force of government.
Retirees want comfort, they need a minor amount of independent financial education. They want products that promise sky high returns for no risk, they need to be informed snake-oil salespeople exist in every product industry, and if we stop one we won’t be able to protect them from the new ones that will come along. They want to not make any mistakes, they need annual financial check-ups from a professional just like they need physical check-ups. Just look at the individuals in the video. The message I believe that was meant to be shown was that people are taken advantage of. As a professional I had to agree with one couple when they stated that the math of their personal investment plan “didn’t work”; though for different reasons than they may have meant. They claimed that having $80,000 after 13 years of investing and watching it disappear would have taken 13 years to recover. Neither of those is accurate, and an investigative reporter may not have used a client saving so little as an example of someone hurt by the retirement industry. I in fact think that couple is being hurt by their comments they were sold a high-cost annuity in an IRA, but this practice of advisors did not seem important enough to cover.
If one needed any proof that counting on government is the wrong answer, we can thank the documentary for including feedback from the government. Assistant Secretary for Employee Benefits Phyllis Dorzi stated, “We don’t have a standard way to figure out who has the expertise to provide advice.”
Like many government officials, she does not seem to understand today’s personal financial services market. The market has long since chosen standards in NAPFA and CFP(r) and ChFC professionals. The market always chooses the standard, but government bureaucrats and those that rely on them to impose their will never seem to come to grips with that.
And so, let me end this piece with a proposal to our retirement experts. Your ways of using force to illicit individual change haven’t been working. How about we all start changing the discussion away from the negative and making individuals more reliant on a government that doesn’t have the answers, to offering real solutions? And, ones that will not harm individuals who are and have always been doing things right like my 32 year old client.
There is no reason to require employers to be investment managers. With the advent of direct deposit, there is no reason your retirement savings has to go to one account with handpicked investments that may not be right for you. If the IRS can send your refund check to whatever financial institution you direct, your employer can too. The only reason we have workplace retirement plans is for government bureaucrats to have jobs and impose rules. Those rules have costs, and employees pay those costs either directly in plan fees, or in lower benefits. It’s very surprising fellow economists do not understand this, so I would urge those writers that want to promote positive retirement change to not take those who do not seriously in this discussion.
Let me also suggest that a discussion begin with the goal of solutions that will lead to more self-sufficient retirees, who are not held captive to their employer, investment custodian, and government’s decisions on what is in their interest. I have detailed a starting point for a plan in a prior piece for Forbes “Get Rid of the Workplace Retirement Plan.”
Unlike those in the documentary, I will admit my solutions are self-serving, but as the only person who profits from individuals achieving retirement success and returning as clients, I have a unique perspective that does not require making up new battles, new plans, new regulations, new costs on employees and employers. As someone who has experience in working with families, institutions, and product providers, I also can explain more than most of our experts on the costs, benefits, and trade-offs. The media may just find my and other independent advisors experiences will be worth hearing as a part of the retirement discussion.
The preceding blog was originally published by Forbes. To view the original blog please visit our blog at Forbes. http://www.forbes.com/sites/feeonlyplanner/