Helaine Olen: Why Your 401(k) Retirement Plan is Failing You

Helaine Olen is the author of Pound Foolish: Exposing the Dark Side of the Personal Finance Industry. America’s growing reliance on the 401(k) is leaving more workers unprepared for retirement, she told FRONTLINE. “We are in trouble, and we know we’re in trouble,” said Olen. This is the edited transcript of an interview conducted on Feb. 27, 2013.

People talk a lot about a retirement crisis.  You’ve written a lot about how it is that people are invested in the stock market like never before. Let’s just go back to when more than half the population was benefiting from some kind of pension plan. We were invested in the market then, too, through the pension plan, right?

But we didn’t see it that way, so we didn’t think about it, and we didn’t understand it. And it didn’t impact our lives in the way it does now, because you weren’t really expected to interact with it, invest, save your money that way. You couldn’t take it out, and so on down the line.

So it was easier for the individual?

It was much easier. It was automatic, and it was done for you. And also your employer contributed to that as well, and they managed it.

So it was a good deal all around?

It was a good deal.

But could it last? Was it realistic? Was it sustainable?

Yes, it was sustainable. … What essentially happens is that the 401(k) comes in in the late ’70s, early ’80s. It starts as a corporate tax dodge, basically. It’s if you’re a high earner, you’re going to put some of your money aside. Nobody ever thought that this was going to apply to the rest of us. I mean, there was never any thought of that.

“Most financial planners would say you need about $1 million to ensure a decent middle-class retirement. Absolutely almost no one is there right now.”

Then what happens is one lawyer does think of it, a guy named Ted Benna, and he goes to what is at that point the Reagan administration and says, “I’ve got this great idea, and let’s let everybody in on the 401(k).” Even then, no one is thinking it’s going to replace the pension. It’s just, “Oh, OK, workers can invest in the stock market and supplement their pensions.”

And then of course the corporate bean counters come in, and slowly but surely companies begin to either let go of their pensions, stop offering them to new workers, and they start matching at the 401(k). But of course that’s saving them money, and it’s saving them money in all sorts of ways.

But if it was working before, why are they suddenly shifting to another system?

They’re shifting to another system for a couple of reasons. The laws changed to some extent in the hopes of buttressing the pension system, but [they] essentially made them more expensive to maintain, so that’s a part of it. But the other part of it is, this becomes part of the short-term stock market culture that starts to build up in the 1980s.

Let’s stick with your first point for a second. So this is the law of unintended consequences. The government is trying to ensure that these pension plans actually function properly, and it raises the cost to the corporation, so they get out of the business?

… Part of it is the law of unintended consequences. But part of it, again, is also that it is cheaper to offer a 401(k) than a pension no matter what, because not everybody will participate.

It’s not mandatory that you offer it. You can offer any match you want whatsoever. You don’t have to offer a match at all. And for the most part, you’re not responsible for encouraging your employees to go into it or not. So the result is it just becomes a less expensive mechanism for the companies to offer their workers.

And one other thing happens at this point, and that is of course the great bull market of the 20th century, which begins in the early 1980s and lasts for about 20 years. [And] employees actually think they’re getting a good deal because they just see the stock market going up and up and up.

It’s now 50 years out from the Great Depression. Very few people are left in the workforce who have any memory of the last time this really crashed. And so people become convinced of this what I call “contradiction,” that both stock market gains were inevitable and their own stock market vesting genius was responsible for their gains.

So everybody thinks they have a hot hand.

Everybody thinks they have a hot hand, and it looks great. So nobody, with few exceptions, is really complaining about it.

And fees in a sense don’t really enter [into] the equation, because if you’re making double-digit returns, so what if I’m giving a little bit to the broker?

Well, that assumes people knew that they were giving the money away.

But even if they did.

People didn’t think about it. When the stock market’s going up 30 percent in one year, hey, so you’re giving away 1 percent or 2 percent. Nobody really cares. Becomes a very different issue when the stock market goes down, or it goes up a minimal amount.

Is it fair then to think of this in terms of just a massive shift of risk away from corporations, who held the responsibility for making sure your retirement money was going to be there, to the individual, who’s now suddenly thrust into the position of having to fend for themselves?

Absolutely. It becomes the individual’s responsibility to somehow know what amount they’re going to need to save, how long they’re going to live, because remember, if you’re going to die at 69, you need to save a heck of a lot less money than if you’re going to make it to 95.

It becomes their responsibility to know how to invest, whether they’re going to need that money at any point, because understand, you can still take that money out for other purposes, and so on down the line. It is a great risk shift, as Jacob Hacker puts it.

… Should corporations be responsible for the retirement security of their employees?

The argument can be made that in the world we live in now, people don’t stay with one employer long enough to make the pension system really work. …

But there are innovative system ideas out there now where people are talking about starting pensions under the auspices of the states, so that people can contribute their monies, and employers, in the ideal world, could contribute. And it could be managed that way, a so-called portable pension.

But in terms of people being suddenly thrust into the position of having to decide how much they need to save and what to invest it in, is that unfair to individuals?

It is unfair to a lot of individuals. Obviously there are some people who feel they are up for the task, but most individuals have busy lives. They’re not really thinking about this.

We have very limited ability to see ourselves into the future, as the behavioral economists and behavioral finance people will tell you, so we’re looking at unknowns. And then of course we can’t predict health care crises, job loss, all the various things that seem to go wrong for people in 2013.

Or even the things that might go right, like you’re going to live a long time, … which could be good in one sense but disastrous economically.

Right, and that’s what the pension and Social Security, by the way, cover. That money is there, and it will get paid to you whether you live to be 69 or you live to be 95 or 105, as the case may be.

Do we face a retirement crisis?

Absolutely. No one has enough money.

How do you define it?

We know that the vast majority of people have less than $100,000 saved for retirement.

A lot of those people are not working or partially employed. When you talk about the vast middle class, what’s the situation there?

Even of people on the verge of retirement, they have less than $100,000 saved. Almost no one has more than that. Sometimes at the higher end, you’ll see $200,000 or $300,000, but that’s about it.

Most financial planners would say you need about $1 million to ensure a decent middle-class retirement. Absolutely almost no one is there right now.

At the same time, we are responsible for more and more of our expenses in retirement. Last year, I think it’s Fidelity came out with a study that said for a couple retiring in 2012, they needed $240,000 to cover medical costs alone. …

So if Medicare pays less payouts to individuals –

It’s not just Medicare paying less payouts. It’s that as we live longer, we need long-term care. Medicare does not cover most long-term care. And so you start getting into things that you’re going to be paying out on your own, live-in aids and such.

You paint a pretty grim picture. If people that are relatively well off only have $200,000 or $300,000 saved up, and they need at least $1 million to maintain a middle-class lifestyle, we’re in trouble.

We are in trouble, and we know we’re in trouble. A survey came out very recently that said about 85 percent of us are absolutely petrified about retirement. This survey gets repeated every year, and the number stays very consistent, and it’s consistent across ages, across generations, across men and women.

We know we need more money. And in fact, one of the things the survey consistently shows is that people believe there’s a massive disconnect between what they need and what they are articulating and what Washington is hearing, because of course Washington is threatening to cut increases in Social Security, cut Medicare, and people need more help, not less.

People talk about the American retirement system. Is there a system, and what is it?

The system is multifaceted. They used to use the phrase “a three-legged stool.” You would have Social Security, your private savings and your pension. …

Most people no longer have a pension, unless they work for state or federal government. Social Security, as we know, is under some threat. And our private savings have diminished enormously. In 1980, the savings rate was 10 percent. Today it is 3 percent.

… Now there are all these financial products that are available. … It’s a very confusing array, a kind of patchwork, if you will.

It is all over the place. If you’re working for the state, you probably have a pension. You might also have access to a thing called a 403(b), which is meant to supplement, and that’s your private savings. …

If you work for a private employer, the chances are at this point you don’t have a pension, though some still offer it. Then you probably, if you’re lucky, have a 401(k). Roughly half of all companies offer a retirement plan.

If you work for a small business, chances are you don’t have access to such a thing. Some companies then offer other supplements. There are various forms of individual retirement accounts and mini-retirement plans for smaller companies. And then of course there’s things you can do on your own, like the individual retirement account.

This is an uncoordinated mess, obviously. There is no central authority, besides the Department of Labor, that keeps any control over it at all. It’s not like you could just call one office and find out what your status is.

Often, people have 401(k)’s in different places. So if you worked, say, for company A and then you got a job at company B, you might have a 401(k) at company A and a 401(k) at company B. Or you might have taken that 401(k) and rolled it over into an individual retirement account, which might well be at a brokerage of some sort. But it’s very unlikely it would be at Company B.

So it’s entirely confusing.

Right.

And I don’t even know — what is a 401(k)?

A 401(k) is what was supposed to be a supplemental retirement savings vehicle.

Why do we have to call it a 401(k)? Can’t they come up with a name for it?

That was the provision in the bill that passed Congress, where it came from. It was the 401(k).

So it’s a part of the tax code?

It’s part of the tax code.

Sort of section 401, paragraph k?

Right.

And 403(b) is the same thing, but it’s when you work for a nonprofit?

Right.

Then there’s individual retirement accounts, and then within these things, you can buy mutual funds or you can buy annuities, but nobody’s telling you what you really should do except for marketers.

Right, in part because nobody can tell you what you can do. None of us can see the future, so we don’t know if that money should stay in cash because you might need it for an emergency. You don’t know if you need to invest it for long term because you’re not going to tap it till you’re 85.

And second, if you’re going to put it in stocks or bonds, you don’t know how they’re going to do. So in one sense, of course nobody can tell you what to do. We can make guesses at what you should do, but that’s not the same as giving you a guarantee or promising you it’s going to be all OK. …

Who are the people that provide these [different financial] products?

It’s the financial services industry. … These are companies like everything from Schwab to JPMorgan to companies you’ve never heard of. There are tiny little companies that provide these plans, who maintain these plans, who sell these plans. So it’s a whole network of companies.

Essentially they make hundreds of billions in profits annually selling retirement plans, maintaining retirement plans, and selling retirement products. As a result, they have hundreds of billions of reasons to sell you on your need for their services.

And they spend a lot on advertising.

They spend a lot on advertising, as you can see if you turn on CNBC. … And the message, by the way, changes with the times. In the earlier part of the last decade, you would see a lot of fantasy retirements. Vineyards were very big for a reason I’ve never been able to figure out … anything that screamed, “Life of endless luxury!”

Today what you see a lot more of is: “We can help you. We’re going to make you feel secure.” So couples in bed talking at night is something you’ll see. One company advertises a target-date fund where they show it making little detours and getting you from the beginning of your career to your retirement. …

… During the Super Bowl this year, there was an E*Trade ad with their baby talking about 401(k) fees.

Right, and the fee thing is becoming a bigger piece of the puzzle, because we finally have regulations around it.

Obviously they wouldn’t make that advertisement if people weren’t getting on to the fact that fees matter.

That’s a good question. What we do know is that for the first time starting last year, we now have the right to know what the fees are for our 401(k)’s. Amazingly, we had no right to know that prior to last year. … However, I must say, a lot of the disclosures are still not very clear.

And they still eat up your retirement.

They still eat up your retirement, though there’s some evidence they eat up a little less than before.

But perhaps most important, it’s still not clear to anybody who covers this whether people are clamoring for this information, because the average person isn’t sitting around watching CNBC, getting information on their retirement through reading Personal Finance for Dummies.

They’re leading their lives. They’re not opening their 401(k) and reading the tiny little print explaining what’s going on. That’s very unusual.

Let me push back a little bit. I mean, this is America. People are free. Choice is supposedly good. We’ve allowed people access to this tremendous marketplace with all sorts of choices. What’s wrong with that?

First, we have this imagined past where we all took care of each other and we lived like the Waltons. We saved our money; we took care of our grandparents. This imagined past never truly happened.

Part of the reason Social Security exists is because as people moved off the farms and into the city, elderly people had this distressing tendency to land in workhouses. Their families did not always support them. …

The second point is yes, of course we would love people to figure this all out, but it gets very harsh very quickly. It often sounds like a mix of some Ayn Rand self-determination tract in a Victorian morality tale. And what if it was your parents or your children? How would you feel then?

So you’re just thrown out there on your own to make sense of all of this?

Right.

Can a person really reasonably, with a reasonable amount of time, understand what they’re being sold and what they might be best buying?

Yes and no is the answer. … The financial services industry does make this stuff sound very complicated when it often is not. Things like a mutual fund are actually quite easy to understand.

Why do they make it difficult?

Because this is the one way to sell you on a need for advice and expertise, … when in fact, people who are educated in this know that the chances are incredible you will do best with a simple index fund.

… So we’ve got everybody now shouldering the risk in a do-it-yourself environment, and you say that’s perilous for people?

We have 30 years of history to tell us this clearly has not worked for a lot of people.

… But the financial services industry doesn’t have a responsibility, does it, to ensure that people save enough? People have a right to spend their money as they wish. …

Well, if you’re offering yourself out as the [solution] to the crisis, then you by definition probably have some responsibility.

In other words, if your advertising says, “We’re here to help you; we’re here to guide you to a safe retirement,” and give you all those pictures of nice beaches or golf courses or whatever, they should have a responsibility to deliver that?

They should have a responsibility certainly to act in your best interests.

But they’re basically saying, “We can get you there, but it’s up to you to make the deposits that you need to make, to take enough out of your paycheck.”

This leaves out the fact that most people simply can’t do it. And as I said, they can’t do it for any number of reasons. They can’t do it because most of us are not financial experts. As [finance writer] Jane Bryant Quinn told me, … “If they were really interested in finance, they’d be working on Wall Street.”

But it also leaves out the fact that we are really asking people to perform a mathematically impossible task, and that is, in an environment where your salary is stagnating and falling relative to inflation, that you should be able to save at least 10 percent of your salary for retirement. Some people are now saying up to 20 percent, by the way; that as college costs have been going up at rates well beyond that of inflation, not for years [but] for decades, you should save up for your children’s college education; as health care costs are going up at rates well beyond inflation, again not for years but decades, that you should be able to somehow foresee your health care crisis, know how much you’re going to need to save. And by the way, save for the occasional little splurge, the little trip away.

It’s really not possible. And the industry is, whether deliberately or simply because this is their model, selling you on this idea that it is. It’s very much part of our culture to believe that it is. …

You’ve written a lot about the “financialization” of American life. What do you mean by that?

The best way to explain it is this. I was born in the mid-1960s. The year I was born, [the] credit card is less than 10 years old. [A] married woman would not have any right to one for almost another decade. There were no ATM machines. There were no adjustable rate mortgages. There were no retirement accounts.

[Mortgages] were all 30-year fixed. Sometimes somebody would have a second mortgage. It was not called a home equity line. This was considered to be something you did only under severe financial stress. … And maybe you had a basic bank savings account, maybe some life insurance. That was about it. You weren’t expected to know anything else.

And so all of these innovations debut, and we just assume people are going to keep up, but of course we have no reason to think they’re going to keep up. We have no background of any point in history where people were financial wizards and managed this stuff quite well. …

Wasn’t the sense in the ’80s and ’90s that this was all working pretty well?

That was the public sense, but the people who were studying it were already quite concerned about what was going on. Even by the mid-1980s Karen Ferguson, who is a pension expert — was and still is — wrote an op-ed in The New York Times saying this was not going to work out very well, that this newfangled 401(k) thing wasn’t helping people.

… Talk a little bit about the public sense that existed. Remind us what that was like.

It was euphoric. People saw stock market gains, and they just thought they were theirs for the taking. My favorite study came from Gallup — and this was done in 1999, so we’re talking about the height of the dot-com boom — and they found that people expected 30 percent average annual returns in the market in perpetuity, so not for one or two years.

But that was what they expected, because it had happened quite recently, so it became this idea that this was all going to go incredibly well. …

And during this period of time, you see the emergence of people like Jim Cramer? …

You see people selling people on the idea that they could beat the markets, never mind just keep up with that, if they just had the right investment sauce. As I always like to say, why are they selling it to you if they’ve got the secret? Certainly they should be on a yacht off the tax-free seas somewhere, trading away happily.

… You had other people in the more popular vein of Suze Orman and others. But there was the emergence of these financial gurus that we all were quite charmed by.

They gave you this idea that this was doable. I mean, the appeal is sort of endless. And what I came to feel is that there was a certain amount of people [that] were scared. These people offer a solution. They’re often, though not always, appealing to older people. CNBC has an older audience; most people don’t know that. You get a lot of retirees with time on their hands.

We always think of day traders [as these] hot-shot guys in their 20s. Well, in fact, most day traders are now, from what we can tell anyway, people who have lost their jobs or are just panicked about stuff. And they don’t go by the name “day trader” anymore. They call themselves “swing traders,” “market timers.” They have all sorts of names to make it seem like what they’re doing feels like a real job.

But what I found, and what other people have found who looked at this, is that it’s mostly men, downsized, 40s, 50s, sometimes 60s, and they’re just trying to keep up.

And this stuff is very marketed in that way. I saw one ad for trading options, which is just really a bad idea — but, you know, “I was panicked about my retirement.”

Options are like highly leveraged bets, right?

Right, and this is not something you should try at home, really. Not a good idea. Futures trading, that’s another one. Forex [foreign exchange market] is one of the great ones now that’s —

Currency trading.

— currency trading. Seventy-five percent of people who do that will basically lose their money within a couple of months.

But people understand, no, that they’re in a casino and they’re trying to double down and make it big, because some people do hit it big, right?

That’s mostly a myth. What we know from the studies of the people who look at this data, roughly 1 percent, maybe a little less, of us have the ability to beat the markets year in and year out. That’s very unusual. So it’s sort of like saying anybody could be Albert Einstein if only they went to the right school.

We have a clip of Peter Lynch, Fidelity Magellan, a legendary mutual fund manager, saying: “You don’t have to know that much. Don’t be afraid. Everybody can do this.”

That’s really not true. It just isn’t. … This idea that somebody who’s just sitting at home doing this after work for a couple of hours, maybe a couple times a week, maybe every day, is going to do it is almost absurd.

So it’s like playing the ponies?

More or less, except it’s more respectable. …

… United Technologies has introduced something called the lifetime income strategy. It uses a variable annuity. You buy into this, and it ensures that you will have a steady income stream into retirement. Is that a good product? How do we judge these things?

Variable annuities are potentially one of the most complicated products out there.

Does that make them bad?

It makes them very hard for most people to invest in, because even the people selling them often have no idea how they’re really working. … Suze Orman, who is a former annuity salesperson herself, has told people not to buy them. …

So what’s a fixed index annuity?

It’s an annuity that could be tied to any number of stock market indexes. It’s very complicated. There are ways to lock in gains. All of these things of course cost extra fees. I guarantee you the vast majority of people who are buying them have no understanding of what they’ve just been sold, partly because they come with lock-in periods and very high surrender fees.

So lock-in periods, where you have to pay a penalty to get your money out, can often go up seven, eight, nine years. Now keep in mind, this is a product being sold often to people in their 70s and 80s. You have to start wondering if these people are really aware of how much money they’re tying up and for how long.

And if they try to get out?

They surrender 20 percent, 30 percent. They’re sometimes also marketed as a way around various Medicaid restrictions. This is not true. And to be fair, that’s shameless agents. I wouldn’t say any [one] company is doing that, but it has definitely been pitched at seniors that way, and I’ve seen it. There have been cases where these things have been sold to people who are in early stages of dementia. …

Is there anybody that should take a serious look at purchasing a fixed index annuity?

I certainly wouldn’t recommend it. My bias would be you never want to lock up money like that, especially given the ages of the people that these are marketed to.

But I’m locking up that money, right, if I buy a fixed index annuity, in order to allow the seller of that annuity to ensure that I have a fixed income stream later on.

There are other types of annuities that will do that, too, but they might not keep up with the stock market or attempt to keep up with the stock market.

There’s immediate annuities, deferred annuities. Immediate annuities are quite simple. Basically I retire tomorrow, I turn money over to an insurance company, and they give me a fixed sum for life.

“Roughly 1 percent, maybe a little less, of us have the ability to beat the markets year in and year out. That’s very unusual. So it’s sort of like saying anybody could be Albert Einstein if only they went to the right school.”

There are some pluses to that, and there are some minuses to that. The pluses are, obviously, I have a guaranteed income stream. The minuses are, should I die tomorrow, my children will inherit that money. Some don’t come with inflation protectors.

The payouts, right now at least, are quite low because of the interest-rate environment we’re in. And there’s also the fact that these annuities charge women a lot more than men for the same product because women live longer.

One other thing I should say: Most of us don’t have enough money to even make it worthwhile, so it doesn’t matter. The GAO [Government Accountability Office] says it really works if you have at least $300,000.

I don’t understand why you give up your money to somebody else to then titrate it out to you over time. You could do that yourself.

The idea is that should you live to be 98, you have a guaranteed income stream.

So that even if that money that you gave them has been depleted, they’ve entered into a contract where they’re going to cover you because they’ve done some actuarial calculation that a number of you are going to die early, so we’ll use that money to pay the people that live too long.

Right. And then the way the indexed annuities work is that the money, to some extent, keeps up with stock market gains. So you’re not immediately surrendering all future stock market gains.

It’s all incredibly confusing.

And it should be. … I have to be honest and say while the U.S. government is recommending immediate annuities, I’ve actually told people to stay away because I feel it is so complicated at this point, and that if they go to a salesperson, they are quite likely to be sold not what they were looking for and not even necessarily realize it right away.

I really think people need to take a second look at this. We need a lot more regulation in this area than we have right now.

Now, if the person selling it to you is a fiduciary — has fiduciary responsibility, in other words — they are supposed to, by law, have your back.

They won’t, because it’s coming through the insurance industry. and very, very few insurance people work under that standard. Again, this is one of the issues with annuities. Certain types of annuities are regulated by the state; other types are regulated by the federal government. So even if something goes wrong, people don’t even know necessarily who to go to.

I’m ready to run out of the room screaming.

You should be. That’s why people like Suze Orman say stay away from variable equity indexed annuities.

And at each turn of the page, I’m being charged fees.

Right. And these things come with very substantial fees. …

… Let’s switch to a simpler universe of mutual funds: actively managed or index mutual funds. They charge fees, the so-called expense ratio. How do I know how much I should be paying there?

You probably should invest in a very simple index fund and have a very low fee. Vanguard, for example, manages to do index funds with fees of 0.2, 0.3 percent. There are other people who do the similar fund, and their fee is 0.6 percent.

So what are they doing for that money?

What do you think? They’re profiting. They’re not doing necessarily anything different.

Why is Vanguard offering it for so much less if their competitors are charging two or three times more?

Vanguard is owned by the investors, so it’s a slightly different structure. But the other thing that’s going on is the real money is in the managed mutual funds, right? So you’re paying management fees for somebody to do active trading that we know will not beat the market year in and year out.

… But you’re buying an actively managed mutual fund because somebody might have a hot hand, or you believe that somebody has a hot hand.

Or more likely you’re doing it because somebody sold it to you. …

These are all these guys that are making all these very nice ads and spending millions of dollars on advertising to pitch products. And what you’re saying is that it’s a scam. Is that too strong?

That’s probably too strong.

Why? You’re describing an industry that’s selling you things you don’t need, telling you to churn your money so they can make money, charging you fees that bring them enormous profits. Why isn’t that a scam?

This is my personal definition. I always say a scam is when people are really doing it deliberately, like Bernie Madoff. I actually think a lot of these people think they are acting in your best interest.

I don’t think most of us go to bed at night or wake up in the morning and go, “Gosh, I’m going to sell really bad advice to a lot of people this morning.” I find that these people actually believe in what they’re doing. They happen to be wrong.

There are any number of studies that show that index funds that charge low fees on average return more to you as a saver than the actively managed fund, on average.

Right.

… I asked a JPMorgan banker if it was better to invest in an index fund or an actively managed fund.

And what did he say?

“Depends.”

JPMorgan was in The New York Times a couple of months ago for selling clients on their in-house funds that had high fees and were performing significantly below industry average, as they like to say, which is a very fancy way of saying they were pretty subpar.

This is where I just wonder why you wouldn’t call it a scam. These people that are in the business know that the index funds do better, right?

I think so, because I —

So they’re selling you something else, right?

Maybe a better way to put it is, I might say it’s a scam, but they probably would not, because I think they really believe in what they’re doing.

No, but they know that the index funds do better.

They convince themselves that’s not true. …

But wait a minute. All the studies — how can they convince themselves that’s not true?

Because they’re convinced they’re recommending the fund that’s going to do better.

I talked to one woman at Prudential who’s head of retirement or some such title and asked her if she was aware of the studies that show that index funds did better over time than the actively managed funds, and she said she wasn’t.

That’s unbelievable. I find that actually unbelievable. … So maybe then it is a scam if somebody’s telling you that. …

… It’s like, you come to my showroom, and I sell you the car that drives more poorly, has more accidents, breaks down sooner, that makes me more money.

Right.

Now, that’s what car dealers might do. … Somehow we have a different expectation of these people. Are we naïve? Are we the suckers here?

Absolutely. This whole industry is predicated on being your friend, OK? They’re going to present themselves as your friend.

All industries do that.

This industry does it in particular. I mean, do you go hang out at the golf course with your dentist? Probably not. But people often play golf, for example, with their financial adviser. As I always say, we don’t pay our friends to hang out with us.

These people are very much salespeople first and foremost. And yes, they receive incentives for what they’re selling. And the more unscrupulous or the more delusional among them will sell you what is more in their best interest than yours. …

… What’s a financial adviser?

That is a term that means almost nothing. It is somebody who might be a financial planner, who could be a fiduciary, or it could be a broker who is really a salesperson.

So that’s a catch-all term?

It’s a catch-all term that just makes people sound more important than they often are.

And then a registered investment adviser — what’s that?

That is someone who does indeed work to the fiduciary standard. These are people who are registered with the SEC [Securities and Exchange Commission] as what the industry calls RIAs, … and they are obliged to act in your best interest.

Would there be a situation where I would ever prefer a broker dealer or financial adviser that wasn’t a registered investment adviser? Or should I always prefer somebody who has fiduciary responsibility?

I would argue you should almost always be with somebody who has fiduciary duties. The only time you might not is if you wanted to buy bonds or individual stocks. It is going to be quite hard to find somebody, as of right now, working to the fiduciary standard.

… My question is really, the average person going into a bank or a brokerage should be looking for somebody who is a fiduciary?

Right, but they’re not going to find it. The chances are incredible they’re not going to walk into a bank and find a fiduciary. …

So where do I find one of these people that’s truly a fiduciary?

The first thing is, if you walk in, you should ask right away. Maybe you’ll get lucky.

In other words, I should ask if you’ve got one of these RIAs, these registered investment advisers?

Right. … Ask your friends, and then double-check, because your friends might think they’re working with somebody who is a fiduciary, but they probably are not. … The surveys show that more than two-thirds of us think we are when in fact maybe 20 percent of us are really doing it in real life.

There are organizations that only work to the fiduciary standard. Probably the most well known is NAPFA [National Association of Personal Financial Advisors].

Let me recount a conversation I had with a retirement officer at JPMorgan. I said, “Shouldn’t I want to work only with somebody who has a fiduciary obligation?” Answer: “Not necessarily.” I said, “No?” And they said, “No.” “Isn’t it better?” “Well, it’s different.” I said, “It’s not better?” And they said: “It can cost more. You may not get any different advice or outcome. It can cost you more.”

The thing that they always point to is cost, because people are often not aware of what a broker is charging them because they’re working on commission. So they’re not paying directly.

If you’re working with somebody as a fiduciary, you’re paying them directly, whether you’re paying them by the hour, whether you’re paying them a percent of assets under management.

But make this simple: Am I going to be paying more for a fiduciary?

Hard to know the answer to that. Depends on how much —

So they’re right in a way. It depends.

Yes and no. We don’t know the answer because if you’re a frequent trader, no, you’re going to pay a lot less ultimately.

I’m just a guy who’s trying to save for retirement. I’m not a frequent trader. …

Depends on how much money you have. If somebody is charging you, say, $250 an hour, if you’re paying, you know, 1 percent out and you’re worth $20 million, chances are you will pay more money that way.

On the other hand, you will get probably much better advice, and you will get advice that is in your best interests. And you might well earn more money in the long run.

The average person should prefer to work with a fiduciary?

I believe so. … A lot of these answers are complex. That’s one of the problems, because everybody’s situation is so individual.

But people can’t be expected to just be told, “Look, there’s no simple answer.” Something’s wrong if we can’t give people answers that they can comprehend.

I agree. But that’s where some of these gurus and whatnot are coming in, because they are presenting it as a simple answer with a simple solution and you just don’t know it. They prey on people with this exactly because we do want that simple answer.

How is this a retirement system?

I don’t really see it as a real system. I see it as maybe a retirement mess is a better word for it. …

What does this term “leakage” mean? …

Leakage is when you take money out of your 401(k). And there is this perception out there that we do this because we’re ill-disciplined and we want to go on vacation, or we want to redo the kitchen, or we want to buy a new pair of shoes, whatever it may be.

In fact, what we know is that a lot of people are doing it because they don’t have a choice. If people are saving money in their 401(k), they often can’t afford to save money elsewhere. So they hit a bad patch of unemployment, health care crisis, kids need to go to school, that’s where they’re going to turn. …

You’ve written about the myth of saving by cutting down on certain expenses, such as the latte that you get every morning and afternoon.

This was one of the great myths of the 1990s and the 2000s, and people still believe it today for no reason that I can fathom.

This whole idea grew up, as our savings rate plunged in the past several decades, that it wasn’t because … our health care costs are rising, that our education costs were rising, that housing was rising even as our salaries were stagnating. This idea grew up that … it was that we couldn’t resist buying Starbucks, or we couldn’t resist redoing our kitchen, or we couldn’t resist the designer clothes at the store. And so there was this whole idea that “Oh, you’ll save all your money up just fine. Just give up some small luxury like a $5-a-day latte.”

“We absolutely deserve better. Why would you think we deserve this?”

Well, it doesn’t work, and it doesn’t work on a lot of levels. First, the math was way off. The person who originally calculated this forgot to account for inflation and taxes and things like that. So, in fact, his multimillion-dollar savings account was really about $170,000.

Still not a bad sum of money for giving up coffee, right? … A lot less than $1 million, though, but still, compared to what most people have, it’s a pretty good deal. Problem was, though, that’s not our problem. Our problem is the things we can’t do without. It’s health care bills. …

Have we got the retirement system that we deserve? …

We absolutely deserve better. Why would you think we deserve this?

Well, we built it.

We didn’t build it. This was a complete accident, and I don’t know about you, but I have no recall of voting for any of this. …

As a people, how have we done this to ourselves?

I don’t think we have done this to ourselves. The survey data shows 85 percent of us can’t stand this and really just want pensions. …

American corporations will say: “We can’t afford to provide the kind of pensions we did when America was the dominant economy on the planet. We’re in a competitive environment. The costs are higher. We can’t provide for our employees in the way we did in the past.”

What is now being talked about is a different sort of thing, where you would contribute some of your salary, company would do a match. And this would all be required, by the way.

That’s a 401(k).

No it’s not, because it’s managed outside of the company. It is managed like a pension fund, except of course it is not a state pension. … Your monies would be converted to an annuity at the time of retirement. The corporation would not be responsible for it.

What’s wrong with having the corporation responsible?

The problem is, of course corporations go out of business, or they change you over to 401(k)’s, or you move on to a different job. So the idea is you want this to be portable and this to be managed by someone outside of the corporation.

So it’s not a confusing array of different options. You don’t end up with three IRA accounts and two 401(k)’s. You have your money in an account. It stays in that account, and you can keep track of it.

Right. … California has recently passed legislation where they are now studying, for hopeful implementation in the next couple of years, where workers who don’t have access to corporate or employee retirement plans would be able to put in 3 percent of their salary, and the state would hire people to manage the money, and the money would be turned over to them in the form of an annuity at the time of retirement.

Would they get a match from the state?

They would not get a match from the state. And at this point they are not talking about doing it as a match with the employer either. But there are other people who are talking about similar plans where there would be an employer match.

I’ve heard people talk about 2008. … What did Warren Buffett say?

“When the tide goes out, you see who’s swimming naked.” I think he might have said it before 2008, but don’t hold me to that.

But in 2008, we certainly had this event that exposed [that] if you didn’t understand the risk you were taking in 2000, if you somehow got through that bubble pop, you certainly knew in 2008 that you were in trouble.

… This time I think people understood that the stock market really is not a guarantee, to put it nicely, and that they were pinning their futures on something that might not really be there for them.

I think they also got an understanding — and I think this understanding grew over the past several years as the incomes of the upper end of the spectrum have really gone up and everybody else’s have stayed down — that this wasn’t a scheme that necessarily operated on their behalf.

Can you retire successfully if you wait until your 40s, or late 40s, to begin saving?

If you have a multimillion-dollar income, you might be able to pull it off, but I would say your chances are not great. The numbers start to go up dramatically. If you wait till your 50s, I think you need to save over 50 percent of your income. Again, we live in a country with a 3 percent savings rate. I don’t see that that’s going to happen.

That’s a very grim statistic. … If you’ve gotten to 50 and you haven’t put away a significant amount of money, you’re saying the game is over?

The idea right now is people are trying to encourage people to stay in the workforce longer, which in one sense is wonderful — and I should say I am the granddaughter of someone who worked till she was 93, so I am really a supporter of this — [but] on the other hand ignores the reality that most of us retire not because we choose to but because we lose a job and can’t replace it, because of a health care crisis either of our own or a spouse or another family member. And we’re really not prepared for it. We think we’re going to be able to manage this feat of somehow working till 75 and be fine, but often we can’t. …

What is revenue sharing?

A less kind word is pay to play. There is a couple of ways you’d look at this. We have this assumption that the funds we’re being offered in our 401(k)’s are often the best, picked by our companies just specially for us because this is going to be the best way for us to save for our retirement.

Like a select menu in a fine restaurant.

Right. In fact, revenue sharing is companies, mutual funds and others, pay to be on the platform, and money goes back to them.

There’s a thing called the 12B-1 fee. That’s an advertising fee that’s attached to the fund. … There’s all sorts of fees that start coming in.

And so the funds we are offered … aren’t always the best funds for our circumstances.

… Somebody calculated I think there was something like 17 different fees in some mutual funds.

There are more fees than you can imagine in these funds. There are more ways to get the money out. It’s been calculated that you could lose up to a third of your savings in these various fees over time because of the monies not earned. …

Why do you have to start in your 20s or 30s?

That’s the way it works the best, because then you get up a really decent sum of money. So if your sum of money doubles in 10 years, to take a very loose example, and it doubles again in another 10 years, and it doubles again, I’m assuming we’re in a great investment environment, right? The greater the sum, the greater the doubling. …

Somebody made the point that during the housing bubble, the banks loaned us money, and then we paid them interest rates, and they made money off of that. This is kind of the flip side of it. We’re actually giving them money. … This is a good business.

It’s a great business. That’s why so many people are in it.

… In this case, the money is brought to them, and they don’t charge a fee on what they make for us; they charge a fee on what we hand them.

Right, they make money win or lose. Your 401(k), for example, you’re paying management fees whether the market goes down 40 percent or whether it goes up 30 percent. You’re paying management fees no matter what. It’s a good business model.

Why shouldn’t it simply be the case that I pay a fee to my broker on what they earn me?

That is what’s called the assets-under-management [AUM] model. … This is mostly fiduciaries who work this way. Some work under a thing called assets under management, and they take … usually a standard 1 percent. The idea is of course that 1 percent is greater if they’re making money and less if they’re not. …

… Why is the assets-under-management model a fair model? Why shouldn’t they simply charge me a fee on the gains in my portfolio? In other words, if we lose money, why am I paying them anything? I earned that money.

It’s an interesting question, and one solution has been — and you’re seeing a bit more of this — financial planners and some advisers who now work on an hourly rate. So I bring you my portfolio, and you charge me $250 or $300 an hour for your advice, and that’s it. So whether I make money or lose money, that’s all you’re going to get. So it’s like fee for service.

… But if you make nothing, why should I pay you anything? … I’m just parking it there.

I would argue that’s not totally fair to people who are giving advice, that their advice is often going beyond just simple money management.

If they’re doing right by you, they’re often talking to you about long-term care costs, whether you should have a will, other things like that. … People do deserve to get paid.

And in a bad market, it’s not their fault that the market is going down. But I do want them to be incentivized to make money, not simply to make money whether we win or lose.

Well, the second you incentivize them to make monies, you get the situation we have now, because they’re incentivized to make money all right, but they’re incentivized to do it in a way that doesn’t necessarily make you money. And you can’t blame them for the greater stock market or praise them for it on the other hand either.

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