Michael Falcon: Retirement Crisis? Not Exactly.

As head of retirement at JPMorgan Asset Management, Michael Falcon leads one of the largest asset and wealth managers in the world. While the nation’s retirement system may have its flaws, mutual funds have simplified investing “in a way that I think is very beneficial to the consumer,” he told FRONTLINE. This is the edited transcript of an interview conducted on Jan. 20, 2013.

Let’s talk about the so-called retirement crisis. How do you define it? What is it?

I wouldn’t call it a crisis. I think we have, as a society, a lot of issues facing an aging population. I think individuals have needs, and they differ. But I don’t see a crisis across the country.

That’s not to say that it’s not a difficult situation for many Americans who are in or approaching retirement, but I think there’s Americans certainly in the current economy that have difficulties in any age segment. …

People call it a crisis because a very small percentage of households really have sufficient savings to really look forward to a comfortable retirement, right?

I think the averages can be deceiving. There are numbers that are popularly reported or referred to relative to average participant balances, for example in 401(k)’s or average IRA balances. And it’s important to understand that those averages include workers who are in their 20s who have perhaps just begun saving, aren’t even in peak saving years. You have people in their middle years who are hopefully really engaged in saving and putting away money but also have peak expenses relative to older children, educational expense, perhaps older family members that they’re caring for. And then you have people who are at the end of their working career. I think EBRI [Employee Benefit Research Institute] has published recently a lot of very interesting data that looks at older cohorts. And you see averages in the $200,000, $250,000, $290,000 balance range.

We also have some good information in the last couple years that links 401(k) balances with people’s IRAs. And we can start to look across the system a little bit differently and realize that people did have prior employers. They’ve perhaps rolled money out of the system into an individual retirement account or an investment account. So I don’t think that the averages tell the whole story.

I’ll just give you one stat from The Wall Street Journal and get your response: Just 8 percent of households approaching retirement have [the] $600,000 or more in their 401(k)’s that would be needed to generate the kind of income that they’d need, approximately $40,000 a year.

I’m not familiar with the study that you have. But does that include just their average 401(k) balance in that cohort, or are you looking at people who are long-tenured employees, or across all of their 401(k) assets, or their 401(k) and other assets? The number strikes me as low.

Right, and you haven’t even mentioned the value of their home.

Value of their home, though we do see an increase in people carrying mortgage debt into retirement — not at the same level that people in lower-age cohorts carry mortgage debt — but yeah, certainly other assets as well.

But I think even just if we’re going to look at the retirement system and how the specific vehicles like 401(k), like IRA facilitate people to engage in proper saving and accumulation investment behaviors, I think it is fair to look at those account types.

“What I worry about when I hear the term ‘retirement crisis’ is that people will give up; they’ll disengage.”

Looking at an average of people who are 60 years old, you have people who have been with that employer for 30 years, perhaps had the 401(k) available for most of that time — certainly the last 20, most large employers 20, 25 years have had 401(k)’s prominent — their average balances are much higher.

When you have people who have changed jobs, perhaps you have somebody who’s 60 years old, they’ve only been with that current employer six or eight years, but they had accumulation in prior plans that could not be picked up just looking at average account balances because they’re somewhere else in the system. But if you add those smaller amounts together, you start to get meaningful numbers.

Would you say then that the popular talk about there being a retirement crisis is overstated?

… I think it’s overstated. And I think even more than that, it’s problematic, because crises can lead people to action — that or fear. And fear may not be the best motivator in these cases.

And I think we suffer from already a lot of distrust in the system and the institutions and government and financial institutions and employers and companies, whether it’s through policy, through job security, through an economic cycle.

And what I worry about when I hear the term “retirement crisis” is that people will give up; they’ll disengage. What’s the incentive for me to participate in the system, to actually contribute money, to actually spend the time to learn something about saving and investing, which isn’t on the top of most people’s list of favorite things to do, right?

So I’m more interested in a positive dialogue that shows people a path, that gives them the opportunity and gives them information and helps keep them engaged in these good behaviors. …

We’ve seen estimates that one in five Americans will retire and face poverty.

The number is unfortunate, [but] doesn’t surprise me. And I can’t speak to the validity of that estimate, but there’s a significant number of Americans that live in poverty today. … There’s a large number of people today that don’t have income or sufficient income, that live at or below the poverty line or just above it and don’t accumulate. They don’t have savings and wealth today.

It’s hard to imagine that the system would provide for those people, which speaks to the importance of Social Security solvency and safety nets and other programs in terms of a policy perspective.

But I don’t think we necessarily judge the 401(k) system or the IRA system by that cohort.

… A large percentage of employees were given a defined benefit pension plan in the past. What happened to that retirement system? …

First of all, it’s interesting, because the number of people who actually had defined benefits is actually much lower than people perceive it to be. … I think it peaks around the high [of] 40 percentage in terms of private-employer population. …

But that’s still a large percentage of people, 40 percent, that had a good deal.

You still have I think high 20s in terms of percentage of the private workforce today. So it certainly declined with the growth of other programs.

I think what’s happened is companies have for a number of reasons — financial risk, exposure, costs, volatility in earnings, litigation risk through fiduciary duty — moved away from providing those types of guarantees and have shifted to programs that are contributory. … So we’ve seen a shift as defined benefits have flattened in terms of their availability and the level of benefit that they pay across the workforce.

We’ve seen a substantial growth in the accumulation of assets and national wealth, if you will, in defined contribution and then the individual accounts that are largely filled by rolling over. So today there’s over $10 trillion in defined contribution and IRA vehicles, and the vast majority of that money has accumulated over the past two decades.

Roughly what percentage of people are participating in a defined contribution plan?

… It’s between 50 percent and 60 percent of the workforce I believe has access to a 401(k) savings plan through their employer. Participation rates vary by industry and employer and plan size.

In the market that we serve, corporate and larger, more established businesses where company matches and modern enrollment techniques in terms of getting people into the plan [and] keeping them there, it’s not unusual for us to have participation rates in the high 80s or 90 percent of all company employees contributing to the plan. …

Are we better off than we were?

That’s a very good question. The answer is, I don’t think we’re worse. I don’t think we’re worse off as a whole. But I think we have real challenges relative to saving adequacy in the system.

And that goes to coverage, and it goes ultimately to individual behavior. There are large percentages of these populations who are engaged in very good behaviors and are in very good shape. We see it all the time.

You’re talking about behavior. You mean saving enough?

Saving enough and investing wisely, which means broadly diversified and rebalanced regularly. And those positive behaviors also mean not panicking and staying the course, understanding that volatility and risk are part of what it takes to save and invest.

And I think as a country [we] want a discussion about that, about the role that the government, the employer and the individual plays in this mix. I can’t say that we necessarily have that balance exactly right, but it is a dialogue that I see taking place, and I don’t think it’s bad to have everybody engaged in that.

So we’re in transition.

I think we are definitely in transition. …

As somebody who speaks out on policy, are you disappointed that we’re not further along?

That’s my nature, right? I’d always like to be further along in the discussion.

There’s a lot of discussion around fiscal cliffs and deficit reduction and the size and the role of government, and one can only be hopeful in encouraging that Washington figures that out, because these retirement issues are very integral into that discussion and dialogue.

We also look to policymakers to encourage innovation and development in the system. I see corporate sponsors, who are in many cases my principal clients; they care greatly about their employees. They care about their companies, of course, and their employees are a key part of those companies. But they really want their employees engaged, and they spend a lot of time and effort on plans.

Where I have concerns sometimes is in policy that I could see diminishing the role of the employer in that equation. I’d like to keep the workplace engaged in the retirement equation. I think that’s a good thing.

How did the 401(k) plan come about?

The plan came about in the early ’80s as a supplemental savings program. So the original installation of 401(k) was around an additional accumulation of retirement benefit and savings beyond the traditional defined benefit plan. …

Initially wasn’t it about senior management deferring income for tax purposes?

I think the same way that the defined benefit plan creates a deferred benefit in retirement, yeah, the 401(k) and the IRA is a tax-deferred investment vehicle.

But didn’t we sort of back into it being a plan for all employees?

There’s no question it wasn’t designed initially to be the primary vehicle. But we also don’t have the 401(k) today that we had when it was introduced in 1981, 1982. We have a much more vibrant program that really is directed at the masses. …

So it starts as a supplemental savings program, and the initial contributors into that program I think were managers and executives of the firms that had the time and money and inclination to even put them in. They weren’t widely recognized or known or available or accessible, let alone did people have the impetus or the money to contribute to them.

Over time, through the ’80s and into the ’90s, there were increasingly efforts to engage the broader population to participate in those plans, and that’s the advent of the company match. …

… It wasn’t as if the government said, “Hey, here’s a new plan that companies can participate in deferred taxes.” It was something that was discovered.

So there’s two basic types of pension vehicles. … Defined benefit simply means that there’s a benefit that’s been defined that’s certain. And so somebody is going to contribute and pay and fund the acquisition of that benefit which is fixed. It’s determined in advance.

Social Security is a good example of a defined benefit program, correct?

Exactly. There’s a program that we know what’s going to pay out at the end, and then investments are made. Social Security is an investment program. But yes, there’s certain activities that you engage in pre-benefit with the assumption that you’re going to receive things that are already determined up front at a later point in time.

A defined contribution program … is simply a plan where you’re defining not what you’re getting out of it but what you’re putting in.

So both vehicles have been around. The expansion of the 401(k) certainly started as a supplemental program, and that’s where it started, but to say that we discovered it I don’t think tells the whole story.

I think it’s certainly been brought to the masses. The original contributors were executives. But you can’t have a plan that qualifies under ERISA [Employee Retirement Income Security Act] that’s limited in availability and participation to only certain segments of an employer’s population.

So it became very popular and grew very fast throughout the ’80s and ’90s.

… We characterize the ’80s as the decade of awareness and the ’90s as the decade of accessibility. So 1981, nobody knew what a 401(k) was. By 1989, it’s in the lexicon. It’s being written about. It’s being talked about.

Throughout the ’90s, all large employers effectively have plans in place. People are participating in them. Mutual funds become available in the plan. The Internet comes to the forefront, so now people have accessibility and information. Cable television explodes, so we have much more financial news. We have channels dedicated to nothing but financial news 24 hours a day, and I think it continues to grow from there.

… The rise of the 401(k) and the commensurate rise of the popularity of mutual funds [are] tied together, right?

I think very tied together, because now, for really the first time, you have large portions of the population engaged in investing activity. And the mutual fund offers a great way for people to do that in many regards.

It’s money that’s managed by a fiduciary that has an obligation to the fund’s shareholders and investors to always act in their best interest. You have a regulatory scheme relative to the Securities [and] Exchange Commission about how funds are created, how they’re priced and distributed.

So you have lots of oversight, and you have lots of transparency. You can look up the price and the value of the fund. Back in the ’90s you could look in the paper; today you can look online. So everybody always knows what they have, and I think that built a lot of trust in the system.

When programs were first launched, there were collective trusts. There were guaranteed investment contracts or income contracts with insurers. They were more institutional vehicles, and they lacked transparency.

You also, in fairness, had a shift in that time of cost. So as companies went through various cycles and looked at cost and cost-containment programs, increasingly the cost of sustaining the plan was being covered out of the plan assets and investments, some of which of course came from the company, but some which came from the participant. So that’s another shift that was taking place.

In other words, the individual employee was bearing the cost of running the mutual fund.

So the answer is yes, but that’s not necessarily different than how it is in the benefit world either. The difference is that as an individual, I’m looking at my piece of this larger account, right? And the investments that I’m choosing, or perhaps fees that I’m paying, are supporting the plan. So there’s more of a direct connection.

But if my employer is funding the program or sponsoring the program, that’s still money that’s being spent on [my] behalf. So either it’s money that the employer is putting as a comp and benefit dollar, but instead of giving it to me in my paycheck where I can go out and spend it, they’re using it to provide for this plan. …

… Why is the mutual fund so attractive as [an] investment vehicle inside the 401(k) plan?

I think mutual funds are attractive inside the plan and outside of the plan for a lot of reasons. One is the simplicity. You have a wide variety of mutual funds. They typically have a very clear investment strategy and policy statement. There’s a lot of available information about them because they’re widely known.

So you have a very liquid and transparent vehicle in terms of open-ended mutual funds. I can buy and sell them, redeem or invest in them with very little restriction. The distribution of them is regulated and registered, so there’s a lot of protection that goes into that system. And liquidity. So it’s a very effective vehicle for people to diversify their holdings.

If I had to go out and invest in a diversified and well-balanced way, I’d have to learn a lot about a lot of different instruments. I’d have to make decisions about risk and asset allocation. Then I’d have to say, “OK, I want an exposure to this market or this sector of the market.” I’d have to pick the individual companies or even the individual securities within those companies.

Mutual fund investing allows an investor to rely on a professional, an organization that’s much better resourced, tend to be focused on very, very specific things. And they market that credibility and that experience in a way that I think is very beneficial to the consumer. …

You say there’s a lot of information made available, and that’s true. They put out prospectuses, and there’s lots of detail in there. But who reads them? And how well are individuals taking advantage of the information that is available to them?

… The people who are reading them in large part are the professionals involved, the intermediaries.

There’s a segment of the population that as individuals are active investors. They’re interested in this. They subscribe to periodicals. They’re reading. They’re doing research on the Internet. They’ve perhaps subscribed to services that rate mutual funds, that write about management philosophies. That’s an engaged level of the population, and that’s fine.

That’s a very small part of the population.

It is a small part of the population. … So the answer is that people need advice. Information is not advice.

The availability of information could be [comforting], because there’s a sense that someone’s looking at it, and indeed people are. So having it available is some protection of me not reading it, because I can feel comfortable that somebody out there is, and if there was a problem, it would be on the news; it would show up in the paper. I would learn about it and hear about it that way.

The guy down the block who you think might know a little bit more about finance is looking at the mutual fund, and so you’re not so worried.

Yes, and hopefully it’s not the guy down the block, but it’s a trained professional. …

But in spite of the transparency that exists, people aren’t really looking through the window.

… You may buy a mutual fund, and the fact that you’re not reading every page of the prospectus doesn’t change the fact that the provider of that mutual fund has named fiduciaries and a board and a regulatory and oversight process.

They’re engaged in hundreds, thousands of hours of diligence around procedure, process, reporting accuracy, that there are substantial penalties associated with failing to comply with those things. And I think that’s why you see very little issue relative to mutual funds as investments go.

So performance may be better or worse, but I think the vast majority of mutual fund-investing experiences are positive relative to somebody, an investment manager saying, “This is what I’m going to do; you’ve entrusted your money with me; here’s how I’m going to invest it,” and then doing that.

… In the ’90s, mutual funds were charging fees. There was an explosion in the investments into the industry. There were large profit margins, and polls show that people didn’t understand that they were even paying fees.

Fee within the mutual fund or within a 401(k) plan?

Within the mutual fund investment that they were buying through their 401(k) or even their IRA. … The industry has been criticized for charging fees that people didn’t really understand, fees that were not even cited in many of the prospectuses, that were so-called hidden fees.

… From what I know of history, and from where I sit today, there’s a lot that’s changed. …

Fees were higher in the ’90s. They’re lower now. There’s scale in the system now. There’s technology that’s brought huge efficiency. You have a vastly, much more competitive offering relative to the types of investments and the providers of investments, so you have a competitive environment.

There certainly have been changes in regulation relative to disclosure, and there’s been much more popular press awareness relative to fees and costs. …

… People have said to us that during the ’90s, the markets were very strong, stock prices were rising quickly, and that really gave people the sense that fees be damned, you know? …

I think for a lot of reasons there was maybe less focus on fees as a single item. I think people always feel better when the market is going up than when it’s going down.

In terms of long-term retirement savings, we try and counsel people to ignore the near-term volatility up and down. And I would posit that people in the ’90s and even in the earlier or mid-part of the 2000s, they may have felt that they were in a better spot. But I’m not sure that they were.

What do you mean?

Well, I think the most important determination to positive outcome in retirement saving is contributory.

In other words, are you saving enough?

Are you saving enough for long enough? Are you doing it consistently? And I think the investment equation is actually an easier component to solve.

People may feel less comfortable with that, but if you are diversified and rebalanced over time, I think the probability of you having acceptable outcomes within a reasonably predictable range is very, very high.

So people were making mistakes there in the ’90s when things were going well, or in the first part of this century.

I think people were making mistakes. I think they weren’t contributing enough. I think that’s an issue that many people still face today.

There’s lots of good reasons why people don’t contribute enough. Again, it’s not that people lack the intent. In some case it’s skills or awareness or ability. Just because of a financial situation relative to their living expenses and how much they make, it’s difficult for many people to save.

Can you sort of tease out the common mistakes that people were making as the markets were rising? Everything looked good.

When you’re looking up, and everything’s moving up, everything looks good. … [There's] the roar of the crowd, and I’ve seen something and I’ve engaged in something and I’m getting a positive reward, so I’m going to continue to do that behavior.

People end up in concentrated positions in their own employer’s stock or in particular investments or funds or vehicles so that they’re not as broadly diversified and they’re not rebalancing.

And rebalancing is something that we argue and we can see in the plans that we service, [that] it really requires a professional discipline, because you’re by definition selling the things that are doing the best and buying things that are doing the worst. That’s the way you rebalance a portfolio. And it’s a very, very hard thing for people to do emotionally. …

I think individuals and employees, participants in the plans, are learning, and I think employers are also learning through the ’90s as well. So by the time we reach the end of the decade, people are saying: “Well, you know, maybe having 40 or 50 or 70 mutual funds in our core investment lineup isn’t a good idea. Maybe we don’t need to offer the Northwest Tech fund or these more micro-focused investment vehicles and position them so forwardly to our base.”

Why did they offer so many funds?

There was demand. People were interested in it. I want to see what’s happening in the markets. I hear what’s happening to my neighbor. It’s a little bit we hear about all the winners but not necessarily the losers.

I used to joke that people in the late ’90s, they may spend hours scouring the newspaper for a coupon to save $50 or $100 on a microwave oven, but they would buy a four-letter ticker symbol, overhearing a conversation on the train, in a tech stock that they didn’t know anything about the company.

Or a mutual fund that charged a 5 percent fee.

Any investment that they didn’t necessarily fully vet or research or understand. And so I think there was a lot of demand, and you could certainly see a natural inclination for people to say, “Well, more is better,” right? …

Another way you’ve put it is that the ’90s were sort of a do-it-yourself era.

Much more do-it-yourself.

And now we’re turning back to providing more advice to people.

Right. Do it for me. How am I doing? What should I do? And can you do that for me?

And this comes from a recognition, doesn’t it, in the industry that we can do better by the employees?

Yes. …

I don’t think anybody would argue that there aren’t some costs associated with running a mutual fund. Question is, are people paying too much?

I think that’s a question that can only be answered in the marketplace. And I would say that there are a variety of mutual funds that invest in different ways that have different cost and fee structures, and that people have a lot of choice and ability to vote with their wallet and vote with their pocketbook.

There are other components to the margin that you reference, though, that don’t deal with that investment equation, that deal with distribution of financial product, that deal with providing services relative to administration or advice that individuals get either in the workplace or through a financial adviser or a banker, where value is being added elsewhere in the process.

A lot of people don’t have the interest to dig in and become an investment expert. They don’t want to do that.

And they don’t understand. There’s an AARP study that shows that 70 percent of respondents to their poll don’t know that they’re paying fees.

I’m familiar with the AARP study, and it doesn’t surprise me. I wish people were more aware and more engaged.

But the logic of, OK, so I participate in a 401(k) plan. That doesn’t show up for free, right? There’s some cost to that, and so I’m paying for it. My neighbor is paying for it, or my co-worker is paying for it, or my employer is writing a check that they could have otherwise spent on my salary or some investment in a new plant or whatever it was.

There’s a cost to providing that. If somebody’s aware of it, and they’re engaged as part of being interested, and if that helps them save more and invest better, I’m all for it.

If they are going to look and see a fee and a cost associated with that as a reason not to save and not to invest, then I’m discouraged. So I take the point. The information is available. We have research in our own book. We service over 2 million employees and workplaces across the country.

And 600 different companies.

And provide 600 different companies, over 2 million individuals. We talk to our clients all the time, and we talk to the employees all the time: What do you want more of? What do you need? How should we give you this information? How do we engage?

Sixty-five percent of our latest survey respondents say they are interested in getting more information; 65 percent of the respondents also say that they don’t read what we give them already.

So I think what we can do is make a good-faith effort to communicate in the most effective way [and] that we’re not static about that. We’re dynamically trying to find ways to engage people, to make them aware so that they do understand. …

… Actively managed mutual funds: Do they do as well as passively managed index funds?

The question of active versus passive is one that’s been debated in the industry for a long time.

What’s the verdict?

It’s interesting. I think the debate is that both are here and both play vital roles, and some of it is a question of belief in investment philosophy. Some of it is a question, I think, of market environment. …

“I used to joke that people in the late ’90s, they may spend hours scouring the newspaper for a coupon to save $50 or $100 on a microwave oven, but they would buy a four-letter ticker symbol, overhearing a conversation on the train, in a tech stock that they didn’t know anything about the company.”

The way we approach it with our clients is on a very specific basis: What is a company’s investment policy? What is their philosophy? Where are they going to make the trade-offs to spend additional money to try and gain additional investment performance? And where might they be better served in using index or passive investing to handle parts of the portfolio?

From an individual standpoint, if you told me you were going to work with online tools, you were going to use index investing through ETFs [exchange-traded funds] or other mutual fund instruments and assemble a diversified portfolio and rebalance it, I’d say great. If you really do that, and you do that consistently over years and decades, I think you’re going to have a good outcome.

It may not be the best outcome that you could have had in hindsight with some active management in there at points in times or throughout the portfolio, but it’s not going to be a problem.

By the same token, very few people actually do that, and so I think there is a role for index investing and passive management and allocations, but I think there’s also a real role for people who specialize in market strategies and investing and in asset allocation and for investors to take advantage of that. …

But don’t the studies show that they would do better, on average, to be involved in a broadly diversified index fund than to try to pick a number of actively managed mutual funds?

I don’t know that I would encourage an individual to simply be picking their individual funds. As I’ve said, I think people should work with an adviser. …

… Jack Bogle would say: “Stop fooling yourself. You can’t beat the market. You’re better off investing in a broadly diversified index fund than in actively managed mutual funds.” What do you say to that?

I think he’s a — I’m not going to second-guess him. I’m going to say that I think that there’s a role for actively managed product in the marketplace.

But that is second-guessing him. He’s saying …

Okay, so I’m second-guessing Jack Bogle. I respectfully disagree.  … I think there’s a role for active management in portfolios. That’s my belief.

I think you can do better in extended markets and extended asset classes in particular. I think there’s a way through actively managed funds to get access to specific segments of the market at various times that are important and that meet your needs, whether that be income or yield.

Not all investing is through market cycle and through periods of volatility. Certainly as you approach retirement, the idea of managing volatility and managing your risk in a different way relative to inflation or market downturn, there can be roles for active managers. …

But you have to do market timing in order to be in the right actively managed mutual fund at the right time.

I don’t think you need to do market timing. You need to have a portfolio allocation model, and you need to have criteria by which you’re going to evaluate which managers you use. …

If I’m going to go in a specific sector fund, for instance, that’s in biotechnology or in large industrials, I’m deciding that that sector is doing better than another.

I think that’s a common misconception. There are certainly investors who do that. … Within a portfolio construction, though, typically you would use those vehicles to increase or decrease your exposure to a particular thing but in a relatively modest sense.

So in a diversified and rebalanced portfolio, you may decide because of economic conditions or your particular needs in the portfolio for a period of time that you want to overweight or underweight a sector.

That’s a very sophisticated set of decisions that you have to [make].

I agree, and I wouldn’t advocate that the individual investor in a 401(k) plan be anywhere near these types of products on a stand-alone basis unless they were really committed to doing the research or working with an adviser that would help them construct that. …

My advice to those people is to get professional advice, and in the context of their 401(k) plan, for the vast majority of them that means being in their target-date fund.

The target-date mutual fund is a great innovation, or the target-date fund that may not be a mutual fund but may be in a different vehicle in their employer’s plan. And those funds are also available in a retail environment.

What is the fee range in the target-date funds that you offer?

… Most of the fees would be below 1 percent at this point. …

And mutual funds are cheaper on average.

Mutual funds on average are cheaper than they were, and gaining access to financial service and advice can be cheaper than it was as well.

We have access to online brokerage activity. You have different types of financial advisory offers in the marketplace through banks and brokerages and independent advisers. You have fee-for-service advisers. You have resident registered investment advisers [RIAs]. So there’s a proliferation of this.

This, from a market sense, I think is great. … I think this is the direction of the industry and what’s happening. I think what tends to get lost is the role of deferral and savings in the actual savings.

The responsibility of the individual.

Such as the responsibility of the individual. I think it’s the [responsibility of the] individual and the employer and the whole system to encourage people to save money, and it’s a hard thing to do.

It’s hard culturally. It’s hard socially. Emotionally it’s hard. There’s a lot of research in behavioral finance. There’s lots of work that looks at deferred gratification around financial decision making and how the brain, how the biology of our brains react to risk and loss and how excited we are at the anticipation of a win or a gain, how the anticipation is actually even higher in terms of satisfiers than actually receiving the award.

And these are tricky things for us to deal with. If you look at where financial advisers, where 401(k) providers, where employers are spending their time and their effort today, I think it’s around that level of engagement.

But marketing also seems to promise people certain near-term rewards, long-term rewards. … I see these ads. I see people on sunlit beaches with graying hair, healthy, looking comfortable.

Yeah, you also see ads that make fun of those ads now. So I think there’s a healthy level of cynicism in the American public, and I think marketing is more sophisticated than that for most of the large players in the industry.

It’s more sophisticated. Is it more true?

Yeah, I think it’s true, because I think there’s value in getting people into a good saving and investing discipline. … We’re on this information revolution/evolution, where people are more aware and are more engaged.

We don’t just go to the doctor now. We Google the disease or ailment or a medication. We can look on WebMD. We can learn about things. We get different opinions and information in lots of different ways. I think this is true in personal finance, too.

I think there are behavioral biases and cultural biases that are difficult to overcome, but I think the idea of financial firms or financial service firms, insurance companies saying, “Check us out; look at our information; come and meet with our adviser; come and see what we have,” I think if you dig into that, you’ll see a lot of very right-minded presentations of what people should be doing, of what they want.

I don’t think there’s much success. It’s not part of what I see as the mainstream retirement industry out there saying, “Here’s the get-rich-quick scheme.” … It’s not how we do business. It’s not how we approach our client base. It’s not the value proposition that we’re offering either when we’re working with a financial adviser, an individual or with the plan sponsor, a company and their employees.

Our conversation is about, with an employer: “What are your priorities? What do you want the plan to do? How well prepared do you think your employees are for retirement?” And we will do analysis on those plans and give them our view of where they have issues. …

We have a lot of sponsors and employers that we work with, and they say, “Wow, I want to get as many people engaged, and maybe they can’t save the king’s ransom while they’re here, but I can teach them good behaviors. I can get them in a plan. I can give them a good balance. It will be a good start.”

And as they progress through their year, they’ll develop good saving and investing behaviors, accumulate some money, and that money can grow over time.

Another criticism of the model is that when you go in and make these sales pitches to employers to sell them a 401(k) plan that you’re going to perhaps do the record keeping on, you’re also selling your funds into that — not exclusively, but in many cases you’re putting your funds that you’re going to profit from [into] the sale of those funds.

So sometimes our investments are available in plans that we administer.

Isn’t that a conflict of interest?

I don’t know that it’s a conflict of interest. … In no case am I making the decisions as to what funds are available within the plan. There’s a plan sponsor and a committee and a fiduciary to the plan who’s making decisions about the plan provider as well as the investments that are available in that plan.

But you give a competitive rate to the employer to place your funds.

We give disclosed rates relative to the fees and services that we charge as well as disclosed rates relative to the investment. This is an example where the company is making the buying decision, and almost all of them are working with professional advisers or multiple advisers who do this for a living. They’re analyzing those services and the prices for those services and the investments against a universe of potential investments. …

So the market speaks.

Right, the market speaks. And we’re competitive like any firm. We’re trying to be better at getting results and outcomes. But there’s no situation where we as the plan provider are making the decision about what investment is offered to the participant.

You may not be making that decision, but you offer something called revenue sharing. What is that?

So revenue sharing is a catch-all phrase by which certain investment providers will allow a portion of the fees associated with that investment to cover allowable plan costs within a 401(k). …

… This is essentially a discount that you offer if they take your funds into their plan. Doesn’t it come down to that?

In some cases, yes. But there’s revenue-sharing agreements in the industry that are not associated with a particular record keeper, so you may not do the administration. But you may allocate a portion of the fees associated with a mutual fund to cover those costs on behalf of the participant.

But when you go into an employer and you go into a big company with lots of employees and you say, “Here’s a plan; you get to choose what you want to put into that plan, and here’s some advice,” you say to them, do you not, that you can take in some of our target-date funds or some of our actively managed mutual funds, and for a discount through revenue sharing, you can offer these?

Depends on what we’re asked, right? So in the case of selling to a corporate plan, you’re responding to a proposal. And that proposal may say: “Here’s how I want my plan to be administered. I need your costs for doing this.” And usually you have to break out at a pretty fine level of detail as to what the elements that they would be paying for [are].

“Sixty-five percent of our latest survey respondents say they are interested in getting more information; 65 percent of the respondents also say that they don’t read what we give them already.”

And sometimes, because they’re buying a bundle of goods and services, you may price them out individually and say: “But look, as the collective, we’re only going to have one call center. And we’re going to do this so we have some efficiency, so there’s a certain price.”

And that price can change on the size and dynamics of the plan and the complexity. And sometimes included in that there’s a request for investments. What would you suggest? Do you have investments that you would offer?

The employer says to you, do you have investments that you would offer at a competitive price?

Right, or they’re specifically looking.

But you don’t have a fiduciary responsible to the employer, do you?

We have a number of fiduciary responsibilities to the employer. As a plan administrator, I have fiduciary responsibilities under what’s called a directed trusteeship. So I’m required to keep the assets safe and protected, and I am required to administer those assets based on bona fide instructions from the plan or from the participant.

And those are the rules of the plan and then the law and the regulatory environment that govern those behaviors. That’s a distinct obligation from the investment component.

If I’m an investment manager in a plan, whether I administer the participant account or not, we have the same obligation as an investment provider to keep the interests of the investors in that fund, their best interests in mind at all times. It’s what we do. We take it very, very seriously.

So there are two really separate obligations that are both really important. In practical purpose, they exist side by side in the marketplace in lots of plan-servicing arrangements, and they exist very, very well.

I guess it’s very interesting, because for the individual employee, this is all very difficult and complicated to understand.

… This is not the decision that the individual employee has to make. The individual employee has a plan that’s being provided by their employer, and their employer, in providing the plan, is taking a fiduciary responsibility in establishing the plan for the benefit of the employees.

Right. They have the employer looking out for them. Many times the employer, especially in small businesses which makes up the bulk of the landscape, that small employer may have fiduciary responsibility to his employees. But he doesn’t really have the expertise or knowledge, so he’s depending on what you tell them.

Well, in the small employer market, almost 100 percent of those plans have an adviser intermediary, so he’s hiring somebody who is going to help advise him as to which provider to go to. Typical small employers don’t have time, money or resources to manage the individual components.

Likewise, they buy a much more standard product. But I don’t think that the deficiency in the system is based on how employers are choosing that plan. …

… As somebody who competes in the marketplace, what abuses do you see? Or what challenges do you think there are out there that you would like to see corrected?

It’s a good question. I don’t see any systemic abuse in the 401(k) system. I think accessibility to plans is a big issue. … How can we engage the part of the population that doesn’t have access to a plan today in the system?

I think there’s opportunity there, and I think it’s good. I think we need to be careful not to discourage that small plan formation. And that’s where the policy dialogue is. There’s nobody that I know in the industry that says getting more people to save and getting them to save through payroll deduction is a bad idea.

It’s a great idea. We love to see that. And if you don’t have a plan, I would love to see people be contributing to their IRA. And as easy as we could make that would be great.

… Reaching people in the workplace when and where they’re getting that paycheck I think is a very powerful thing in terms of both starting a good savings behavior and having that savings behavior continue.

… Why should I give up a percentage of the money that I move to you for you to manage? Why shouldn’t you simply be rewarded on your performance?

… The role of the mutual fund is a collective investment vehicle. So the mutual fund says: “If you’re interested [in] investing your money this way, this is how we’re going to invest it. This is our management team. These are our risk parameters. These are our investment strategies. These are the types of securities we will buy or sell. These are the analytics or tools or processes that we use to do that.”

And when you’re buying that investment, … you’re going to pay for that service.

But past performance is no guarantee of future results.

Past performance is no guarantee of future results, but we’re talking about something different. … There are points and times in the cycle when I’ll expect some of those funds to lose value, and that’s precisely why I have a diversified portfolio.

But why should you pay for that?

Because they’re performing a service for me, which is investing the way I want it invested. And I know that through market cycles and fluctuations at certain periods of time, certain asset classes or investment vehicles will perform better or worse. So I’m not looking this month, this day, this week, even this quarter or this year relative to how did this one thing do. I’m looking at my overall portfolio and how am I doing as a whole.

… But why not just pay for performance? What’s wrong with that idea?

I think there’s pay-for-performance embedded in the process already. … But the costs of investing in an asset class that are declining are largely similar to the costs when it’s rising. You don’t necessarily know when that strategy is going to be up or down in any near-term scenario. So I don’t think you’d want an incentive to the industry to do less work or to be less diligent at points in time.

No, I want the incentive to be that they’re going to get paid if they do well. I don’t want to take on all the risk. If I give you my money and buy one of your mutual funds and you break even, I still pay 1 percent. I would rather a system where I reward you if you do well, that I don’t incur risk for you not doing well.

So there is a definite incentive in the mutual fund system today and in how our own portfolio managers are compensated, how much of our own portfolio managers’ personal money is invested in their strategy so that they have money at stake in the strategies as well. So I think there’s a lot of performance incentive. And again, I think the value of the service on any individual mutual fund is there over a long period of time. …

We listened to all the pitches. We got into this, and we fell in 2000. We fell in 2008, and now we’re facing retirement. … How is an individual to know who has their back?

That’s maybe the most important question. The advice that I give constantly is that you have to work with an adviser, and you have to work with an adviser that you trust. …

One of the questions that sometimes people don’t ask an adviser is, “How do you get paid?” People aren’t doing this for free. Advisers, whether they’re fee-for-service advisers or registered brokers or retirement planners, there’s a number of options that individuals have and across a variety of price points. …

If you spend a little bit of time engaged in it, people develop a sense and have a judgment. And if you meet three people, so how do you approach someone in my situation if you have other clients like me? How do you get paid? And how much does that cost? What are we going to do when markets go up? What are we going to do if there’s a recession or if I get laid off or if there’s an illness? Role-play and ask these questions. What do you do in that situation? And if the financial adviser or planner sitting across the table from you doesn’t have a good answer, or you’re not as comfortable with how forthright they are, then you move on to the next. …

Do those financial advisers have a fiduciary [responsibility]? Do they have a legal responsibility?

So they all have legal responsibilities. Some of them have fiduciary responsibilities. Some of them have suitability responsibilities. …

Do you favor expanding the fiduciary standard?

I favor clear delineation and communication of what the responsibilities are. I think that having a mandatory fiduciary standard imposed in all circumstances of distribution of financial products would not be a good thing.

Why not?

Because there’s real costs and complications associated with that, and that could dramatically diminish people’s access to advice that they need. …

I’m hoping that you’ll see clarity about what those roles are. But in the meantime — and I would say even regardless of what happens in the regulatory scheme — the easiest thing is at the individual level.

I can have the conversation. I can ask, … how do you work? What’s your obligation to me? What happens if good things happen? What happens if bad things happen? I think the answers to those questions tell a lot.

If I walk into JPMorgan Chase branch and I ask for some help, there’s a financial adviser or somebody who will come forward and ask me to sit down in their office and tell me they can help me. Does that person have a fiduciary responsibility to me?

So that person would be a financial adviser, would be a registered broker, either Series 6 or Series 7 license, and is regulated by suitability standards. …

… In other words, they have to recommend something to me that is deemed suitable.

For your risk and investment objective.

But they don’t have a fiduciary responsibility to make sure that I do well.

They don’t. The fiduciary responsibility isn’t that you do well, in any case.

… Shouldn’t I want to only work with somebody who has a fiduciary obligation?

Not necessarily.

Isn’t it better?

It’s different. … You may not get any different advice or outcome, and it can cost you more. …

I think the bottom line is, when you make that investment selection decision, you want professional managers. And those professional investment managers absolutely have a fiduciary duty to you. …

You’re going to buy a mutual fund. You’re going to put your money into a discretionary managed account, then yes, those by law are fiduciary vehicles. And the people who are making those decisions are fiduciaries to you. And you absolutely want that, and there’s a cost to that.

If I’m making the investment decision, which is what’s happening in a brokered relationship, then I’m making the decision. You’re giving me information, guidance, education. You may make recommendations, but ultimately I’m the one responsible for choosing which investments I’m purchasing.

… Make it simple. Should I prefer somebody with a fiduciary responsibility?

So that’s a question that can only be answered on a personal basis, based on what your level of need is, what your risk appetite is, and how much of the investment decision you want to delegate.

But this isn’t making it simple.

I wish it was simpler. I think it’s very simple to buy a diversified, target-date fund from a registered representative. … I think that’s an excellent, simple model. …

When I walk into the bank, and I sit down with a financial adviser and they say, “Let me help you,” if they don’t have a fiduciary responsibility to me, they may want to usher me into something that — I mean, they’re working for the bank.

Yeah, but that’s not the way our advisers work or are motivated or are managed.

At JPMorgan. But what about in the industry?

Again, this goes to the importance of interviewing advisers, for an individual to make a choice not from a sample of one, right? … Whether they’re a fiduciary or registered representative, you need to trust their information. And you need to decide how much responsibility you’re going to take versus how much you’re going to delegate, and understand that the more you delegate, the more cost is associated with that, because you’re transferring work and you’re transferring risk. …

But that adviser … may have an incentive to put me in an investment that pays them a higher fee.

Again, I can’t speak to the whole industry. But you have to ask the question. You have to be comfortable with the answer of that adviser. …

Within our organization, we have lots of different models where people invest with us. They direct-invest in mutual funds; they have a private banker; they have a financial adviser.

We have a very large portion of our business that is managed just as a discretionary management account, where we have discretion over the investments and where we are acting as a full fiduciary.

So to me, there’s a marketplace. Those choices exist, and I think people are smart enough to know if they ask the question. It does take a little bit of work. And I would suggest, again, getting referrals from people you know and trust and doing a little bit of research on your own, and asking the questions and seeing which answer you’re comfortable with.

And at the end of the day, an adequate level of savings broadly diversified and rebalanced, regularly managed by a professional, is to me the way to go.

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