Even Harsh Frontline Program on Retirement Investments Understates How Bad They Are

Wall Street must get indigestion every time Frontline rolls out another program showing the depths of its chicanery. The only problem is the industry deserves much worse punishment.

The latest report, The Retirement Gamble, focuses on the scams in the retirement industry, the retail brokers and asset managers who sell products to 401 (k)s and other tax exempt plans. Anyone who knows this arena will find that the report covers familiar terrain. But the appalling fact remains that ordinary Americans who don’t have the time or interest to be full time investors but want to take prudent steps to prepare for retirement are systematically fleeced by the industry. And due to the time limits and complexity of the terrain, the program can hit only on some important issues.

Watch The Retirement Gamble on PBS. See more from FRONTLINE.

The biggest, and the one that is the main focus of the report, is that the fees in 401 (k)s are not disclosed in any easy-to-understand manner, so participants are buying a pig in the poke. Moreover, fees are indefensibly high, in large measure because the firms push actively managed products when passive strategies (index funds) deliver the same or better returns as much lower cost, making a huge difference in the amount investors realize. Comparatively few brokers and financial advisors are fiduciaries; many are on commission or get kickbacks or other incentives for selling high-fee products.

Some of the quotes are devastating:

Prof. TERESA GHILARDUCCI, Economist, The New School: The 401(k) is one of the only products that Americans buy that they don’t know the price of it. It’s also one of the products that Americans buy that they don’t even know its quality. It’s one of the products that Americans buy that they don’t know its danger. And it’s because the industry, the mutual fund industry, have been able to protect themselves against regulation that would expose the danger and price of their products.

And the impact of fees is larger than you might think:

JOHN BOGLE, CEO, The Vanguard Group, 1974-96: Costs are a crucial part of the equation. It doesn’t take a genius to know that the bigger the profit of the management company, the smaller the profit that investors get. The money managers always want more, and that’s natural enough in most businesses, but it’s not right for this business.

MARTIN SMITH: Bogle gave me an example. Assume you’re invested in a fund that is earning a gross annual return of 7 percent. They charge you a 2 percent annual fee. Over 50 years, the difference between your net of 5 percent — the red line — and what you would have made without fees — the green line — is staggering.

Bogle says you’ve lost almost two thirds of what you would have had.

JOHN BOGLE: What happens in the fund business is the magic of compound returns is overwhelmed by the tyranny of compounding costs. It’s a mathematical fact. There’s no getting around it. The fact that we don’t look at it— too bad for us.

MARTIN SMITH: [on camera] What I have a hard time understanding is that 2 percent fee that I might pay to an actively managed mutual fund is going to really have a great impact on my future retirement savings.

JOHN BOGLE: Well, you have to rely on somebody to get out a compound interest table and look at the impact over an investment lifetime. Do you really want to invest in a system where you put up 100 percent of the capital, you the mutual fund shareholder, you take 100 percent of the risk and you get 30 percent of the return?

Boogle’s assumptions are actually charitable. Remember, the fees come out of the account regardless of whether the investment performs. There have been entire decades (the 70s and the decade just past) where stock market returns went sideways. Moreover, that 2% is simply a typical figure. Some products often feature even higher levels of gouging. For instance, Smith interviews an investor who got into an annuity with high annual charges and a 10% exit fee.

And there are even more problems with 401 (k)s that Frontline didn’t address. For instance, most plans let you switch funds only once a year. It’s not uncommon for them to take two to six weeks to credit the money they’ve taken out of one fund to another. And the choice of funds is often limited and poor (for instance, duplicative offerings, such as separate stock and bond funds and then a balanced fund; too many sector plays; not enough asset classes, meaning no international stock and bond funds; often no REITs or real estate funds).

If you don’t have time to watch the entire program, you should at least have a look at how unsavory the executives in the industry are. Some of Mrs G’s faves include 27:22, when Smith asks Michael Falcon at JP Morgan to respond to Jack Bogle’s statement (a fact) that actively managed fund fees eat two thirds of returns over a 50 year horizon. At 36:16, he tries to defend the role of active managers. And at 47:45, he tries telling Smith that investors lose…something…if their advisor does not have a fiduciary duty to his customer.

But he comes off as a typical jock turned retail broker who successfully feigns being a bit at sea when challenged on the basic problems with how he operates. That’s actually a step up from the dripping with contempt Karen Wimbish of Well Fargo. She’s at 32:37. The transcript below doesn’t do her performance justice, I strongly suggest you watch this bit if nothing else.

MARTIN SMITH: The problem is that these fees are not paid by the fund company. The bill is passed to you and me. Here it is, buried deep in my 401(k) plan documents. It took me about an hour to find the reference.

[on camera] Do you think the industry could do a better job of making people aware of the effective fees on their savings?

KAREN WIMBISH, Retirement Executive, Wells Fargo: I think we could make people aware of the effect of every pressure that they have on their accounts.

MARTIN SMITH: What stands in the way of doing that better job?

KAREN WIMBISH: [laughs] I— what I would tell you is, it’s— sometimes, it’s very difficult to get people to focus on something that seems complicated and dull and boring. So could we do a better job with helping consumers understand all the things that are tied to what they just bought, whether it’s financial services or the riding lawn mower? Yes. It’s too complicated.

Translation: Consumers are too lazy to understand this stuff, so asking us to explain our charges to them is a waste of our precious time and resources. Of course, this is patently ridiculous. Fees are simple to comprehend; it’s all the deliberately obfuscatory language that gets in the way.

There are two things I wish the program had been able to address. One is that they had several anecdotes at the beginning of investors who were long equities, thought they were making money, and gave much or all of it up in downturns. Benoit Mandelbrot stressed in his layperson-friendly version of his research on markets, The (Mis)Behavior of Markets, that standard investing theories (the stuff MBAs and finance “experts” learn) lead them to take on much more risk than they intended. So even supposedly educated investors adhering to received wisdom do more gambling than they intend to, particularly over-allocating to stocks.

Second that short job tenures and income instability make it hard for even prudent people to adhere to a financial plan. Martin Smith even confesses he’s had to raid his retirement accounts more than once to pay for a divorce and help put his kids through college. This is something Helaine Olen presents persuasively in her new book Pound Foolish: Exposing the Dark Side of the Personal Finance Industry, and I wish the producers had included those impediments in this account.

And that leads to a final issue: the big reason so many Americans are coming up short as far as retirement is concerned is that worker wages have stagnated, thanks to companies no longer sharing the benefits of productivity gains with employees as was once the norm. We wouldn’t be having a debate about possible future Social Security shortfalls if wage gains hadn’t tailed off as a result of 30 years of policies oriented towards weakening the bargaining power of labor. But you’ll never hear that from the finger-wagging 1%: if you’d only been more frugal and responsible, you’d have an adequate retirement. For the lucky few that have no periods of unemployment, no divorce, no medical emergencies, no sick parents who need time and financial support, that might be the case. But those of us who live in a world whose instability is in no small measure due to rent-seeking by those at the top of the food chain know better.

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96 comments

  1. burnside

    There’s justice in that final paragraph, Yves.

    I’d suggest those same conditions should be at the heart of the inflation ‘dog’ discussion below.

  2. Aussie F

    How dare you justify laziness and question the wisdom of the rentiers…? Sick so called ‘parents’ can simply be left to expire on the street, likewise useless children. The same principle applies to any useless trash.

    Divorce isn’t a problem: Women have prostitution and men can sell blood or vital organs. In any case, there’s no excuse for the sort of careless behaviour that leads to medical emergencies. Only the imprudent, the feckless and the ignorant suffer from those. The free market takes care of those who deserve to live.

    If you’re poor, sick, desperate and defenceless, it must be your fault. Stop blaming efficient markets.

    Arbiet macht frei.

    1. Heron

      Hey hey hey; let’s not be discriminatory here. Men have prostitution, too. In fact, a non-ugly, reasonably fit middle-aged man willing to go through a good pegging or three can make a heck of a lot more -and in a much safer work environment- than your average female prostitute of the same age. And the male-on-male prostitution market’s far more diverse as well; twinks, bears, chubs, there’s demand for all of em.

      Honestly, if labor would just stop being such sticks-in-the-mud and move into the sorts of service industries where the jobs are, we wouldn’t even be having this discussion.

      (Just to be clear, this is satire of structural unemployment arguements, and to a lesser extent libretarian market theories generally)

      1. Noni Mausa

        I distinctly remember predicting this sort of problem way back when 401ks were first instituted. Why didn’t anyone else? I am not so exceptionally smart.

        But where I went wrong was the degree of raiding and the US economy’s wholehearted shedding of a huge slice of Americans as “surplus to needs.” If people have moved en masse to the grey and black markets of labour in the states, (NYT a couple days ago) it’s because the legal, tax paying market isn’t interested.

        I watched a relative’s 401k, the result of eleven years of work, vanish in six months, back in 2008. Half disappeared in the “downturn,” and then he lost his job and had to liquidate the remainder to keep up with his child support payments. If he hadn’t paid them, job or no job, the state of MN could have flung him into prison. Truth.

        Noni

  3. AbyNormal

    here’s a rundown for Annuity holders

    http://investment-fiduciary.com/2011/03/18/variable-annuity-costs-you-dont-know-you-are-paying/

    1. The fixed interest rate of 5.75% only applies for the first month, after that, it will be 1.75% .

    2. Mortality and Expense (M&E) charges are between 1.4% and 2.4%

    3. The death benefit charge is 1.9%.

    4. The rider charge is between 0.75% and 1.5%.

    5. The living benefit costs 0.75% initially, but there is no cap on how high it can go.

    6. The underlying fund expense is between 0.3% and 1.75%.

    7. The surrender charge is 8% for the first three years

    i had No idea: annuity and life insurance products are not under the purview of the SEC

  4. craazyman

    The problem I’m having is being short equities, and then giving it up in upturns. Or being in cash, and giving it up in Fed bubbles. being long gold, and giving it up in bear raids.

    Even with the fees, I’d probably do alot better in a 401K. At least my losses would be capped at about 1.5% per year (not counting market moves).

    But for somebody who doesn’t want to get rich quick and who’s willing to work for a living, Vanguard is the way to go, for sure. No doubt about it. A sucker is born every minute and as long as they’re alive Wall Street will be there to help them suck.

    1. Sleeper

      I’m not so sure about Vanguard –

      I’ve owned several of the Vanguard funds – Healthcare, High Yield Bond, Federal Money Market and I have been disappointed time and again.

  5. Mcmike

    Change is possible. Brokers/managers can have the same reputation as used car salesmen- sleazy parasites whose only operating mode is to rip people off.

    Those annuities are the equivalent of driving off with a lemon that has sawdust in the transmission.

    We should buy mutual funds in the same state of mind as used cars – in a heightened state of skepticism.

    1. Klassy!

      But the problem is that a “heightened state of skepticism” is still not going to save you.

      1. Ms G

        Exactly right. Because the problem is not “investor (rube) savvy” — it’s the product that is inherently defective. But that would be looking at the root of the problem … and require its eradication.

      2. jrs

        Yea even if the fees were reasonably low and you consistently invested, putting your future decades down the road all in stocks and bonds and the like (ok or even in gol and REITs as well etc.), seems a pretty crazy gamble.

        But it is true I never thought about fees much. The thing is things are setup in such a way that to forgo the 401k is also giving up pre-tax savings, and except for the Roth, is also giving up any way to earn tax free profits/gains. There’s not a lot of other options that avoid the tax hit.

        1. jrs

          Oh I’ve been investing in retirement a bit over 7 years. Should have focused on fees more, but one gets overwhelmed with the overall hopelessness of basing one’s ability to eat and get medical care, several decades hence in old age, on what seems like gambling at root (the stock and bond markets). In an economic system that itself seems on the verge of complete implosion. So I’ve often thought getting a career that you could somehow work in old age IS the best plan.

      3. McMike

        Mutual funds: unsafe at any speed. I won’t argue with that. (Does anyone remember the highly enteraining web site of Piere Rinfret? He loved to flog the funds for their corrupt underperformance)

        As long as the government is going to give us substantial tax benefits for saving, many people will need to put that money somewhere.

        You need to keep in mind that your 401k/IRA money has got a 20% +/- advantage over other uses on day one.

        So, just as some car dealers started to migrate to “no negotiation” and “certified used” outlets (with “We promise” forms and price/fee disclosures), alternatives to the Wall Street cabal like Vanguard are emerging.

        The trick is to stick mutual fund managers with the used car dealer label, so they are publicly shunned.

        PS. I didn’t watch the Frontline piece, did it bring up all the other non-fee scandals, like after-hours trading and other perks for key clients? Did it go into how the kickbacks work?

        1. Ms G

          “Mutual funds: unsafe at any speed.”

          This, and T-shirts or stickers showing that the fund salesmen are a lower form than mattress and used car salesmen, widely propagated, might start waking people up.

          I always tell everyone I know to stay away from anyone calling themselves a broker or adviser. The response is often similar to if I had insulted their avuncular uncle (meaning that the sleazy salesman con is very successful).

          1. McMike

            I did catch the bit of the show where that fund hack was mumbling about why there shouldn’t be fiduciary duty.

            Sure, sure, they are just like the guy on the next barstool, who offers his advice in exchange for buying drinks. Lots and lots of drinks.

            Not unlike the rating agencies, who now claim that their entire reason for existence was a practical joke.

            What’s next; auditors come out and admit they don’t really audit independently, that the whole rigamorole about CPA indepdence was, um, puffery. Too bad Arthur Anderson didn’t think of that.

            After that, Congress can come out openly and have a good laugh about campaign contributors versus voters.

          2. Commoner

            As a CPA and auditor, I can assure you that auditor independence is about as real as a centaur.

            As long as the audited is paying the bills, independence is mere academic theory and some bullpucky that we fling to justify our existence.

        2. Ms G

          McMike.

          No, the FRONTLINE piece touched on (briefly) but did not cover how the kickback system works. I recommend anybody who is interested in that story google the SEC study of 10 (?) money managers advisor conflicts of interest and the system of kickback payments (the report was published maintaining the anonymity of the subjects, despite devastating findings that should have resulted in black label warnings for anyone investing in mutual funds).

          The only individual I know of who has been all over the conflicts and the kickbacks — and for a long time — is former SEC enforcement attorney Edward (Ted) Siedle at Benchmark Alerts — http://www.benchmarkalert.com/forensic_investigations-15.html

          The mutual fund and 401(k)/IRA was a three-decade long con that successfully stripped hard earned cash from working people on a scale probably similar or larger to the Milken-era stripping of the pensions at the corporations raided by the asset-stripping firms (cough, “Private Equity”).

          1. McMike

            Man, the hisory of the broker/mutual fund industry is like freaking Monsanto. One long story of serial criminal toxic sociopathic behavior.

            Myself, I put my meager funds in low low fee and as conservative as possible indexes. But I keep very low debt first.

            I figure I still like the 20% tax break off the top. And it beats not saving anything.

            One note: the US Treasury does not allow direct investing in TBills for self-directed retirement savings. Why do you suppose that is? Quo bono?

  6. JohnnyGL

    Yves,

    Thanks for calling attention to this, it was a good program. I was a little disturbed by the Goldman Sachs ad that preceded it.

    One of the things that I think doesn’t get enough attention is the assumption of returns for equities. Jack Bogle, who is one of the best in the industry, still throws out a 7% return estimate. It isn’t clear if that’s nominal or real, but either way, it seems like a rosy assumption.

    Most of the gains for equities in the 1980s and 90s came through expansion of P/E multiples (not sustainable) and through margin expansion (which relies on compressed wages). Neither of these can be counted on for the future, meaning even those who’ve got a low cost ETF or mutual fund will STILL struggle to get decent returns.

    I think it’s telling that bond investors are willing to accept such low rates right now (below CPI), rather than push more money into equities.

  7. Expat

    The rake collected by middleman interlopers in the finance business is all very interesting and should of course be addressed, but my issue is that I have to invest my savings in instruments that don’t serve my class interest.

    Even if I keep my savings as cash in my local credit union, I am providing reserves to fund urban sprawl and big box developments. And blue chip stocks these days! Not one of these gigantic behemoths has grown or survived by sharing productivity gains with workers, protecting the environment, or promoting wiser use of resources both human and otherwise.

    And all you need to do is look around the US or Canada to see decaying infrastructure and patchwork repairs showing the lack of civic investment for the past 35 years. Shiny new drones simply do not count.

    This is terrible — and yet the most powerful tools we have in a capitalist system, the collected savings of workers, are diverted into enterprises destined to lower the quality of life not only for ourselves but for all future generations.

    Leo Panitch observes that this investment in the current form of capitalism by so many workers is an achievement of neoliberalism that contributes to its stability.

    As was noted years ago, even five years into the crisis it is virtually impossible to imagine a thriving alternative to capitalism (and yes, I’ve read Gar Alperovitz). Sadly for most of us, there is not even the traditional religious medicant option for us to spend our old age in service to the deity of our choice and supported by secular means.

    Who knew, back in 1968, that our only choice would be to “Stay calm and carry on”; in other words, state of modern warfare.

    1. Ms G

      “Who knew, back in 1968, that our only choice would be to “Stay calm and carry on”; in other words, state of modern warfare.”

      Well said. And the “carrying on” consisted in a four-decade state of political-economic ignorance fueled by dreams of getting educated, getting ahead, getting stuff, and getting retirement. While the “products” ate up the material foundation of democracy.

    2. LifelongLib

      OT, but I’ve wondered about this myself. If you look at the late Roman Empire you see feudalism in the making, ditto for late medieval society and capitalism. Where’s the sector of our society that will eventually replace capitalism? A few utopian efforts don’t count — it would have to be something that’s an important (if overlooked) part of the current economy.

      Maybe it’s the developing neo-feudalism.

    3. Roland

      I feel the same way. I don’t want to “invest” any more. I don’t want to be involved in this crap. I have simply come to detest financial markets.

      On the other hand, price inflation continues to beat my wages every single year. The loaf of bread I earned today with my labour will be only worth a few crumbs in the future. Therefore, while I work for cash, I don’t dare save cash. Nowadays, to save money is to work for nothing. Even the lowliest prole is flogged by the central banker, and ordered to become an “investor.”

      How about some barbarous relics? Gold is a stupid thing, of course. However, imperialist governments and their central bankers are both more stupid and more barbarous.

  8. Ms G

    Yes, the FRONTLINE program — terrific as it is — does not go far enough. The reality is that 401(k)s are unsuitable vehicles for savings (for non-rich, working people) period. They always were. The only suitable vehicle would have been (and still should be) a Post Office Savings account with guaranteed 4% interest (at least) and no fees. But this model (like Single Payer in the health care branch of our basic needs) would cut out the rentier middlemen (the money managers, the brokers, the mutual fund companies) and eat their obscene parasitically derived rich “lunches.”

    Another aspect of the story that Smith did not cover was the agency of the DOL in allowing the money management sector to get away with continuing to offer “actively managed products” rather than straight index funds with fees under 0.5% and to get away with never, ever, revealing the dollar amount of fees chewing up hapless savers’ returns month after month. (Yes, including Vanguard.)

    The “magic” of compound interest has a flip side, which is the “magic” of compound fees (geometrically eroding your money). But this side of the coin was never mentioned by the sleazy salesmen of “tax deferred products.”

    Nor was the fact that compound interest sort of stops working if the principal is vanishing (as it did in 2001 and 2007-2008). Compound interest of $zero = $zero. Who knew?

    1. Susan the other

      I like the idea of a Post Bank. One that is secure. So 4% is not likely because to give depositors 4% the Post Bank would have to invest in things riskier than US Treasuries. I also like the idea of some kind of a Retirement Mutual Savings Fund where all retirement savings are intended to be long term savings and the money can be invested conservatively directly into student loans at low interest; mortgages that match a person’s ability to pay; new directions like permaculture, thereby eliminating Wall Street banks altogether.

  9. Gareth

    After 30 years of investing in the stock market I did some rough calculations and discovered that my return was similar to what I would have gotten had I simply bought CDs and rolled them over, although I would have missed out on all the euphoria, followed by the anxiety and nausea. This positive return was only possible because I committed the sin of “market timing”, that is, selling during the 2007 bubble rather than holding through the carnage. At this point I am more than willing to accept a 1 to 2% return rather than accept the risk of swimming with the sharks.

    1. washunate

      Hey, I’m curious, why do you talk about market timing as some sort of sin?

      Diversity (not putting all eggs in one basket) is a broadly understood principle. Rebalancing (selling winners) would be conventional wisdom, not controversial, especially once a sizeable asset pool had been built up and time horizons had started shrinking.

      Anyway, I’m wondering if maybe you’re confusing the people pushing a specific bubbly product with actual personal finance? You know, like thinking that the NAR cares about homeowners, or that the companies advertising cash for gold are giving you decent prices, or thinking that you can day trade faster than the algorithms? That definitely is a mistake :)

    2. Susan the other

      Those CDs would have been gobbled up by the debt vigilantes if you lived in Nicosia. And coming soon to a bank near you.

  10. Jeff - Austin

    Wow,Frontline it’s always someone else’s fault. The fact is most people need to take responsibility for their own retirement – we no longer get pensions. If you don’t understand the fee structure you need to go back to school and read some basic investing info. I was surprised at how uneducated the economics major was on EXP Ratio – really! As well as the documentarian, Martin Smith who didn’t even know his plans structure the one he chose for his employees! They deserve to payed for the service they provide. If you receive a company match invest enough to capture the match and invest any other retirement dollars outside in Vanguard, low cost ETFs or you can hope for the best. But blaming the investment company for your own ignorance of the fee structure is ridiculous. Lastly the other irksome point was that they lost 50% during the 2008 financial crisis – only true because they lived check to check, got laid off and then tapped 401ks for loans, which was in fact what locked in the loses. Remember these are long term investments – not emergency funds. Did anyone else notice the MacBooks each of these folks owned! It’s not my fault I spend all my money and assume there will be no bumps in the road the government should have warned me.

    1. AbyNormal

      just a couple seconds more an my popcorn’ll be ready…this should be great

      doubt its not a wild guess your pummpin your resume for one of the goons positions interviewed last night

    2. Wells Fargo Must Die

      This is always the attitude that investment hobbyists like Jeff Austin have. They feel that everyone should put in the time that they put in. But they aren’t investment hobbyists and don’t have the interest and they do not have the time to put in the substantial number of hours it takes to learn these things. Even many so-called experts are completely uninformed on this subject as this documentary showed.

      Martin Smith is like most small business owners. He went to a financial advisor and got a plan for his employees and himself. He chose a lower cost approach not knowing that it would cost him and his employees more in the long term.

      As for deserving to be paid for the service they provide– What a crock of horse hockey. What service are they providing exactly? Management of an underperforming fund at excessive rates and investment advice from a cookie cutter? Some deserves.

      The 401(k) concept is a disaster and will continue to be.

      1. Jeff in Austin

        Whiners. The fact that you were dumb enough to invest before learning that there are better performing, low cost options is your fault. There is a company called Morningstar that rates funds based on fees and performance. If you think you can find better options outside your 401k or there is no company match – go with the lowest cost option you can find. It surprises me that so many will waste time on this message board and won’t find the time to educate themselves on basic financial literacy. The reason I pay attention to this stuff is I want to retire and not work until I am 75 yrs. old – money will compound over time – assuming you choose your investments wisely and hold them forever.

        I quit my sales job, became a fitness professional – make 1/3 of what I used to. live within my means and still save. I decided to take care of my health – because the 2% fees banks and investment companies charge is nothing compared to what the health care industry, Obama and inflation will take.

        1. Wells Fargo Must Die

          Wrong Jeff in Austin. They went to work for a company and HAVE to participate in the plan offered by their employer. Many plans have a 0.75% annual maintenance fee right off the top before you get to invest in their mutual funds with 1.5-2% fees. Many of these plans do not offer index funds because those are not profitable for the plan administrator. This includes outfits like Fidelity.

          401(k)s are a racket and they are draining people dry. Yes, if people did the reading, they could opt out and do better like you did yourself. But having this expectation is simply trying to fix bad with worse. It ain’t going to work. People with your attitude are the problem — not the solution.

          1. Sleeper

            And there’s an interesting twist –

            Company HR departments routinely “sell” 401 K accounts to investment companies. That is fees are generated which revert to the company.

        2. Wat Tyler

          @ Jeff in Austin

          You say ” what .. Obama .. will take” in a discussion of long term retirement planning. In 20 months we will have a new Congress and all eyes will turn to the 2016 Presidental race and Mr Obama will be a very lame duck. Blaming him for your future retirement success maybe 30 years from now is like me blaming Nixon (I am 70 and retired at 56 despite making all the investing mistakes possible. I am the self described worst investor in the world). Presidents come and go in a haze when you can remember Ike.

          Jim

          1. Jeff in Austin

            I’m the problem…you retired at 56…how many years did you pay into SS? Look in the mirror. I won’t be able to draw SS until 70; if there is anything left.

            I’m the problem. Whatever. I take care of myself – eat right, exercise and don’t take any government money. I also strive to pay the lowest federal taxes I can – because I don’t believe the government will use the money wisely or efficiently. I expect to get nothing from them and save as much as I can because NO return is guaranteed. Yes I do take responsibility and educate myself, this takes time and effort – but it’s MY FUTURE. That is why I educate myself about issues that pertain to me and work to limit costs while increasing ROI. Think whole, organic & local food, limited consumption – no ipad, laptop or new car every two years. I also strive for the lowest tax rate possible and make decisions accordingly. My next major goal is to get out of the city to limit property taxes and start raising food to limit food costs. Most of the posters pick one point to argue but when you look at the full argument you cannot refute the truth. BTW – Obama may be out of office soon but the impact from his Affordable Care act will be felt for many years. The new Congress will continue to lead us down the wrong path, as they are spineless and won’t address the real drivers of our deficit.

            Lastly, you don’t have to pay the fees, no one is forcing you to join a 401k plan (although there are some that want to make it mandatory) – but with any company match you are leaving free money on the table – to improve the situation contact your plan administrator to complain, do something besides whine. I have been questioning fees for 15 years – but most care more about reality TV, Facebook and Twitter while life passes them by.

          2. Lambert Strether

            @Jeff in Austin Social Security at 70.

            If we had Democrats worthy of the name, they would be seeking to lower the age of Social Security, so the oldsters still working could stop, and free up some jobs for the youngsters.

            Morever, Social Security should be age neutral. It’s unconscionable that we’ve allowed a two-tier system to be set up with younger people getting less. Granted, back in the day when I didn’t understand that the elites were morally pathological I accepted this way of “saving’ Social Security. I was conned by scammers. You are absolutely right to be angry about that; it’s a complete #FAIL by “liberals” that age neutral benefits are not back on the table.

        3. Noni Mausa

          Jeff, I know it is great to succeed, save and invest, find a job you like, etc. and to feel you are the master of your own fate. But if you were my kid (I am guessing you’re about that age) I might gently remind you that you are one car accident, one affinity fraud, one inner ear infection messing with your sense of balance, one natural disaster away from losing the props that make your responsible life possible. And over these things you have not a whisker of control. One day, classy fit young fellow with money in the bank, a month later, just another American loser, like the other 30 or 40 million.

          Look at your life and ask yourself, what would I do if X occurred? And make X really minor. A broken toe. A summer of being out of work because of a bad case of mono. A false arrest.

          A British study recently found seven, not three classes of people, and the new, lowest class they call the “precariat,” those whose daily life hangs by a thread. In the US, more than half the population now lives a precarious life, with few but the wealthiest able to say, “Whatever happens, I will be fine.” Everyone else is standing at the edge of an unseen but precipitous drop.

          1. Jeff in Austin

            44 ain’t a kid – and I realize how precarious a situation I am in. No insurance for 7 years. Did have a bad ear infection a year ago – but I didn’t need Obamacare to help me – I took care of it homeopathically and cheaper than an MD could or would do it.

        4. Lambert Strether

          Congratulations. One stretch of bad luck, and you’re going to be wiped out by a bug — buzzing “Libertyyyyyyy” all the way into the windshield of life.

          Unless you accept help from the programs that should be there to help you, and that people with your vicious and brutal ideology are attempting to destroy.

          1. Wells Fargo Must Die

            Jeff In Austin,

            Ask yourself this question: “If planning for retirement is best done by not participating in the one plan that has been sold as the key to retirement, what kind of retirement system do we have in America? Hint: It ain’t a good one.

            The 401(k) is supposed to help people retire, not keep them from it. Not wanting to make any changes to the system is not the answer.

            You have opted out of the healthcare system as well. Do you defend it also just because it allows for the skimming of profits? I’m glad you were able to treat your earache. Doubt you’ve have as much success with testicular cancer.

          2. jrs

            Well if he gets testicular cancer we can give him a lecture on how he *should* have had insurance. Actually *IF* and I realize it’s an if, you have the option of having health insurance it seems much more financially irresponsible to me to go without health insurance than to waste too much money on dumb 401k fees because you didn’t investigate them. Medical bills wipe people out entirely financially!! (and aren’t too good for one’s health either!).

          3. Yves Smith Post author

            No, Jeff, for someone who claims to be so savvy, you have it wrong.

            401 (k) s were envisaged in the tax code as a gimmie for RICH PEOPLE. For wealthy private business owners to sock money away before tax. And this was in the era when top marginal tax rates were way high than now.

            Instead, the industry used to it hawk a product chock full of hidden charges. And despite your braying, this is the only option for most people, since if you aren’t self-employed, you can’t put very much in an IRA . I know people who pushed their employer to get fund docs that show the fees and the employer won’t divulge them!

            Plus the fund salesmen lie and people trust them. One of my brothers is a blue collar worker. His employer rolled all the DB plans into private retirement accounts. The salesmen were all over that mill like cheap suits. They were hawking stuff like annuities. I told him to avoid the annuities like the plague, but he asked a few questions about fees and was suckered in because he trusted the guy. Look, I have to confess I’ve been suckered on smaller matters (Chase on its supposed “no fee” business accounts, where two branch managers told the same likes about what it took no to be charged a monthly fee). Someone like my brother wouldn’t have been able to parse the legalese even if he had gotten the fund docs. And he’s hardly alone. Alan Greenspan said he couldn’t understand a credit card agreement, they were too dense legally. The obfuscation is by design and multi-layered. What is a guy like that supposed to do? He has been forced into a game where the odds have been stacked against him, and you blame the victim. People like you are why banking will never get fixed in this country. You blame victims when what we need is more collective ire and action against predatory financiers.

            Oh, and BTW, option ARMs are another product that’s fine for rich people (folks with erratic but high incomes, like Wall Street folks who get big bonuses once a year) and were mis-sold by the industry. This is a regular pattern, but you insist on airbrushing it out of the picture.

      2. Ms G

        “What service are they providing exactly?”

        They are providing a service to themselves at their customer’s expense — easy as Pi: convince “investor” to buy defective product and pay fees, collect fees and laugh at “investor” being sunk by his designed-to-suck product.

    3. McMike

      Oh for sure. Every American should become an expert personal investor, also an expert financial planner, and an expert insurance broker and real estate agent as well.

      They should also perfom their own brain surgery, and when they travel, they should pilot thier own 747s.

      1. Ms G

        Best summary. And also best riposte, next time someone tries to defend their fraudulent paycheck with the “you should have been an expert” shtick.

        Thanx!

        1. Ms G

          Hmm. Not sure about that — the real Galtian may maximize his freedom by having someone else do the actual building … manual labor, sweat, etc., not sure that counts as part of the Galtian ideal of “work.”

          1. J Sterling

            But wait, when a member of the John Galt creator class employs a laborer, isn’t he doing him a favor, letting the worker have the benefit of his wealth creation, while all the worker does in return is some work. And he even gets a wage for it! It’s practically altruism.

            No wonder John’s gone to Gulchland.

          2. Ms G

            Who said the Galt guy would actually pay the worker who builds the plane? As you said, he is doing it “noblesse oblige,” as a favor, namely, giving the worker an opportunity to keep his skills current so as to make him more employable after 5 years of un/dis-employment.

      2. Klassy!

        Oh I get it now. When the transformation to an every man for himself society is complete and it is populated chiefly by lecture bestowing prigs you won’t want to stick around anyway so who cares about retirement savings.

      3. jrs

        You forgot, we must be our own nutritionists and experts on agricultural issues as well, because arsenic in chickens and rice, and GMOs (without so much as a label), and cows with anti-biotic resistent bacteria, and sewage sludge as fertilizer and …

        And we must be our own experts on medicine because the medical system doesn’t take actually helping people get better seriously and half the phramaceuticals do more harm than good in the name of profit.

        And we must be an expert on obscure laws to make sure the 1% don’t claim our carefully saved emergency funds for derivatives.

      4. jrs

        We must also be experts at making economic predictions of future job markets so that we only study the right things, taking into account not just what is currently in demand, but also how many other people are also studying for that career to avoid ending up in a previously promising career that now has a labor glut. We must also take into account future laws when doing so (immigration reform flooding the market), plus future economics (recessions killing a luxery market etc.).

        And even 18 year old young adults should be held to this standard even though they lack even the most rudementary understanding of such workings of the world in many cases.

        1. Ms G

          Right on. It would be interesting to create a scroll-like document with the long list of things we should all have been “experts” in so as to have better navigated the past 40 years of our lives. The generations coming up might benefit — ha ha.

    4. Lambert Strether

      Grammar check on aisle 666, please!

      UPDATE Adding, I should try to be kinder… The ideology hits my knee with a humongous hammer, and so I forget the importance of personal circumstances.

    5. AbyNormal

      i am popcorn stuffed and can’t remember an NC time where i went from laughter to tears an back to footstompin laughter.

      Jeff, its against investing law to incorporate ‘hope n wish’, but in your position…you get a pass. You’ll need it and so will anyone that stands next to you.

      now don’t be a stranger…takes an NC village to put together this much keen insight and i am much obliged to you!

  11. washunate

    Another fantastic post. That headline alone is priceless.

    I love the emphasis on wage stagnation. Other issues, like fees, would return to being minor problems if we undid the income inequality of the past few decades.

  12. banger

    We live at a time when the hustler mentality has taken up a greater part of the society. There have been hustlers always in American society–our culture is based on it in many ways. But there was usually a balance and that balance could be maintained. Some morality some adherence to rule of law would come into play at critical times. Some great political figure or figures would come out and reform the system and make it work. But the stakes have become too high–the old morality (however ignored in the past it still had a strong effect even on Wall Street as a few old pirates have told me) has died out and we are in the stage where the focus of every executive is on looting the public for personal gain. It is the cultural of narcissism gone into overdrive.

    The real-estate bubble showed how an entire industry from originator to investment banker could be dramatically and systematically corrupted as an engine for looting. The entire community of banks, insurance companies and so on are largely run by a criminal mentality. From what little I’ve seen the internal politics of the larger corporate entities is highly competitive, brutal and nasty.

    1. Wat Tyler

      @Banger

      “highly competitive, brutal and nasty”

      Didn’t Thomas Hobbes say something to this effect a few centuries ago? What will be the Leviathon and where will it come from to crush this evil?

      Jim

      1. banger

        Hobbes, of course was totally wrong about human nature and the condition of primitive humanity–the cultural values and conditions of the current system breed a kind of cruelty. Here we live in a world of abundance with technology able to meet our needs but we insist of misery–or I should say we go along with the ideology of miser and cruelty. Rich or poor, as far as Americans are concerned, they want to live in a society of winners and losers and the losers must suffer as much as possible.

        1. dan h

          So you think the “balance” was in effect…when? 1900? I say this country was founded on the idea of expansion, ie screwed from the get go.

  13. TomDor

    Getting something for nothing

    The great sore spot in our modern commercial life is found on the speculative side. Under present laws, which foster and encourage speculation, business life is largely a gamble, and to “get something for nothing” is too often considered the keynote to “success”. The great fortunes of today are nearly all speculative fortunes; and the ambitious young man just starting out in life thinks far less of producing or rendering service than he does of “putting it over” on the other fellow. This may seem a broad statement to some: but thirty years of business life in the heart of American commercial activity convinces me that it is absolutely true.
    If, however, the speculative incentive in modern commercial life were eliminated, and no man could become rich or successful unless he gave “value received” and rendered service for service, then indeed a profound change would have been brought in our whole commercial system, and it would be a change which no honest man would regret.- John Moody, Wall Street Publisher, and President of Moody’s Investors’ Service. Dated 1924

  14. Jim in SC

    The biggest drag on investor returns comes not from fees, but from investors poor market timing decisions. I certainly agree with the Frontline piece’s criticism of fees, but that isn’t the whole story.

    http://finance.yahoo.com/blogs/breakout/research-shows-market-timing-cost-big-time-130824983.html

    Interestingly, the following article from Motley Fool about Edward Jones has plenty of criticism which could presumably apply to the industry at large. At some point in the comments, a 35 yr Jones broker points out that brokers are there to keep people in the market when things look bad (and that is justification for their existence.)

    http://www.fool.com/investing/general/2012/12/06/can-your-edward-jones-financial-advisor-really-ser.aspx

    For a well informed fiduciary to perform absolutely the best job possible for his/her clients, he or she would have to seek out asset classes beyond stocks and bonds. Few people have the knowledge to do that, and they would be regulated by at least two different regulatory authorities (their state or the SEC and the CFTC). A large portion of retirement assets are annuities sold by insurance salesmen who aren’t regulated by either the state or the SEC. It’s just all too onerous and confusing. Why would a fiduciary who truly understands ‘diversification’, and ‘risk parity’, work with individuals?

    I have heard regulators and legislators speak at industry conferences, and I am sceptical about their understandings of what fiduciary duty means. The people who wrote the 1940 Act were clear thinkers. I think our post-financial crisis tinkering has only gotten us into trouble.

  15. Expat

    I’m a fan of James W. Russell, sociology professor and retirement activist who, as part of the Connecticut Committee for Equity in Retirement, won state professors a chance to rectify the mistake they had made 30 years earlier by choosing a defined contribution plan managed by professionals rather than the state’s traditional retirement plan.

    After 30 years, professors who had made contributions to a defined contribution plan had paid MORE in contributions and received only one half — that’s ONE HALF — the benefits of those who had selected the traditional system.

    It turns out that the defined contribution plan was a retirement plan for the financial industry, not the contributing employee.

    Amid the catastrophe of the worldwide financial collapse, Russell and his group were able to convince an arbitrator to give workers a one time chance to get back into the traditional retirement plan.

    This side-by-side experiment provides a real test of the best way to have retirement security. It turns out that the traditional Connecticut pension:
    — costs the State LESS than 401(k) type plans,
    — lower contriubtions for employees, and
    — higher benefits for employees.

    In contrast, the defined contribution plan is so loaded with fees for both the beneficiary and the state that perhaps half of the employees’ contribution is eaten by fees. More to the point, however, is that the traditional plan is an insurance plan, which pools risks. No payments are required after the beneficiary dies, and the money is thus available to other retirees. 401(k)s, however, are an asset of the beneficiary and whatever is left at death goes to the heirs as a windfall.

    This Milton Friedman idea to force workers to accumulate wealth rather than share risk was gamed from the beginning by the finance industry and ideological corporate executives. As we see everywhere, most people cannot “save” enough for a reasonable retirement, especially since the Wall Street parasites get their cut first.

    Here are two audio files in which Russell develops his analysis and explains his pension victory:

    Berkeley, CA, public radio:
    http://www.againstthegrain.org/program/500/id/472351/wed-11-23-11-retirement-savings-ideology

    Connecticut:
    http://archive.org/details/JamesW.RussellOnTheGreatRetirementRipOffConnecticutCommitteeFor

    Each interview is about one half hour.

    1. Ms G

      Thank you for these revelations and the links.
      The CT success story with returning to the defined benefit plan (and the real-life data about the returns!!) should be common knowledge and also the focused subject of Martin Smith’s follow-on documentary.

      Excellent, thank you.

  16. Gil Gamesh

    If you are deemed personally responsible, then you are in fact unprivileged. QED, nearly all Americans are personally responsible for: the near extinction of DB plans; labors’ declining share of national income; paltry SS benefits; predatory fees in 401K plans; deregulation, regulatory forbearance, and malfeasance; and the enormously rich grifter class that resides at the apex of our Free and Just Society.

    Man. I really fucked up. My apologies to other NC readers adversely affected.

  17. rd

    In the year 2150 the New York Times will still be publishing articles that show that “If you had only done this with your 401k you would have been rich”. Stupid you.

    1. Ms G

      LOL!

      And 2050 is when NYT will have changed its nickname from Grey Lady to Decrepit Hag (but continuing its grand tradition of printing “all the news that fits.”)

  18. A Real Black Person

    Like someone has said before the main issue may be that we may not be able to keep financially supporting a growing elderly population with a capitalist system intact or without impoverishing everyone else. We are unwilling to accept the transfers of wealth required on a large scale, to keep everyone living well into their 90s.

    Pensions have not been properly funded. Some pensions have been raided by fund managers. Social security’s problem, allegedly, is that since Reagan took power, the government has been borrowing from that fund and replacing the funds with IOUs. The IOUs cannot be paid with current revenue, and therefore, money must be borrowed now or in the future order to pay out the current amount of benefits to future beneficiaries. Even if someone chooses to “not believe this”, that someone has to wonder how can social security pay to help support a growing number of the retired for a longer period of time, without increases in taxes or continuing borrowing, BOTH, of which the vast majority of taxpayers are apposed to.

  19. ep3

    what i don’t get yves is that when people had employer paid pensions, part of their salaries were put into investment funds where the funds were managed to gain a return that allowed those funds to be paid out eventually. Now, ppl put part of their salaries into investment funds that are managed individually to be paid out later. Why, in the era of “pooling resources”, like with health care, is it better for the individual to invest versus pooling the funds and having them actively managed by a team of experts, with that purchasing power behind them?
    The reason, as u say, is fee extraction. (and also to continue to extract all forms of wealth). Do you think that the average Joe is gonna get the best investment advice, at the same level of Warren Buffet? And not even comparing joe to warren, because you can see that effect in small towns as well; someone with a little more popularity in the small town

    1. washunate

      The reason isn’t fee extraction, though. Rather, it is wage stagnation.

      That’s the purpose of the transition to defined contribution plans like 401(k)s – to reduce the total compensation paid by the employer.

      1. washunate

        To be a bit more specific, the transition has been widespread due to the way it provided a convenient avenue for employers to quietly pay average workers less compensation over time.

        However, the other big part of the retirement mess in this country is that public policy has been designed for tax evasion (sorry, incentivizing retirement savings) for high income people. If retirement is a public good, then we should give each citizen the same amount of benefit, rather than giving wealthy people much greater benefits than the rest of us. Like financial assets generally, the bulk of retirement plan assets are concentrated in the hands of a small portion of the population.

  20. Optimader

    Yves
    Excellent post, and you invoke Benoit Mandelbrot!

    As for the finger wagging 1%, I have to believe youre in that fraction of the top imcome quitile , arent you???.
    Its easy to fall into the 1% meme, but there are plenty of us in the upper income fractions of the 1% who are also economic cannon fodder of the banksteropoly, and realize that the currently gamed level of income disparity is unsustainable.
    I suspect a coulpe things
    one, the solution strategy will be unwinding legislated preferential treatment at the corporate level wherein the staff tax attornies accountants and lobbiests have been so effective at buying the process.
    Two, Attempting a redistribution strategy at the personal income taxation level is a dead end That said, situations like dividend vs wage income should certainly be harmonized, morgage deductions eliminated etc
    Three, i suspect with some irony that the legions of finger waggers are largely populated with low information comsumers of domestic corporate media that ARE NOT in the 1% income bracket
    4. I suspect a more fruitful carveout to study would be the top 1% of wealth not income, but i gather im preaching to the choir on this point.
    I apologize in advance for the touchscreen typing….

    1. nobody

      About “the 1%”:

      “[T]the Economic Elite are primarily united by ideology. They’re made up of thousands of individuals who subscribe to an ideology of exploitation and the belief that wealth and resources need to be concentrated into the fewest hands possible (theirs), at the expense of the many… In total, the Economic Elite are made up of about 0.5% of the US population.”

      http://ampedstatus.org/full-report-the-economic-elite-vs-the-people-of-the-united-states-of-america/

  21. Ed S.

    Great points and spot on. The key selling point when the 401(k) was originally introduced was “portability” — and that’s not something to dismiss out of hand. A defined benefit plan was (and is) awesome as long as you can qualify — there were certainly plenty of urban legends about individuals being terminated from employment immediately before vesting (and in the old days, it was typically “long term cliff vesting” — you got your pension if, and only if, you were employed for 30 years. 29 years, 8 months — you got nothing).

    But as with some many things, the cure was worse than the disease. The idea of “same money in your own account” quickly became much less money in an account with restricted and high cost choices. As a case in point: a former employer switched from defined benefit to “money purchase plan” — we went from 1% for each year times average high 3 year earnings to a 3% of base contribution into an individual account (with interest at the 30yr treasury rate). In the former plan an employee who averaged $50k over 20 years would receive an annuity of $10k for life; in the “improved” plan the same employee would receive $30k + interest. The net result: an 80% reduction in the retirement benefit.

    Bluntly put — the 401(k) was simply a back door way to end employer paid retirement benefits. The skim that brokers/advisers/administrators receive is just icing on the cake (and of no regard to employers).

    Asking a typical person to financially plan for their retirement is like two wolves and a sheep planning dinner.

    1. Ms G

      Yes. And if you watch Martin Smith’s documentary it prominently features two if not three wolves — the JPM director of “Wealth Destruction (Management”), that woman from Wells Fargo who has a hard time hiding her contempt for the WF muppets that she has helped fleece, and the woman from Prudential.

      Martin Smith bravely narrated the documentary in the first person of a “sheep.”

  22. PeonInChief

    Yay, Yves!

    And a couple of tangential points. Many corporate executives have 401(k)s, and are guaranteed a six percent return. That policy does not, unfortunately, also apply to line workers.

    Second, the people who make money in the stock/bond/etc. markets have a lot of highly paid people working for them, and those people figure the asset allocation and so on. The rest of us have people who are trying to make money off us, and don’t have enough information to make informed decisions.

  23. Ms G

    The point made in the FRONTLINE documentary by Ghiradrucci and Helaine Olen — that IRAs and 401Ks were created as loopholes for the very wealthy to park *extra* cash without paying taxes on it — should be recalled in conjunction with that amazing fun fact we learned that Romney has an IRA worth $100 million. (A fun fact that also raises some interesting questions about how exactly Romney managed to amass that amount of money in an IRA account when annual contribution limits have been in the $6K to $12K range for a lo-ooong time. Maybe he just invested his four and five figure contributions in really, really fabulous “products.”)

  24. Kunst

    “The 401(k) is one of the only products that Americans buy that they don’t know the price of it.”

    Health care?

  25. skeptonomist

    The fees that 401(k) investors pay pale in comparison to the cut that hedge fund managers get. Not that individuals always have a choice between 401(k)s and some kind of employer plan that may entrust its money to hedge funds, but in the long run the mass of those with the little plans and the little chiselers may come out better than the big plans with the big chiselers.

  26. accidentalfission

    Jeff in Austin really needs to understand the following. He may not until it’s too late.

    —————–
    Jeff, I know it is great to succeed, save and invest, find a job you like, etc. and to feel you are the master of your own fate. But if you were my kid (I am guessing you’re about that age) I might gently remind you that you are one car accident, one affinity fraud, one inner ear infection messing with your sense of balance, one natural disaster away from losing the props that make your responsible life possible. And over these things you have not a whisker of control. One day, classy fit young fellow with money in the bank, a month later, just another American loser, like the other 30 or 40 million.
    ————–

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