The PBS television series Frontline presented a scathing documentary about America’s retirement crisis. It placed the blame for the crisis on the inability or unwillingness of workers to save enough, and the systematic plundering of retirement accounts by the financial services industry.
Understandably, Wall Street is pushing back. Here’s what Investment News had to say today.
Advisers stung by ‘Frontline’ criticism
Documentary had valuable info but sent mixed message, missed key points
Apr 26, 2013 @ 3:24 pm (Updated 5:00 pm) EST
The “Frontline” documentary that highlighted American workers’ biggest obstacles in saving for retirement left a bad taste in the mouths of advisers and industry representatives.
On Monday, PBS ran “The Retirement Gamble,” pointing out that the fees — including 12(b)-1 fees — that workers pay for their 401(k)s are a major obstacle to saving for retirement.
“The 401(k) is one of the only products Americans buy that they don’t know the price of it,” Teresa Ghilarducci, an economist at The New School, said in the program. “It’s one of the products Americans buy that they don’t know its quality. It’s one of the products Americans buy that they don’t know its danger.”
Retirement plan advisers said they feel that they were lumped into the same category as brokers who are in the 401(k) business only for rollovers and who don’t care about the participants’ difficulty in saving for retirement.
“It was horrifying. It was the same message of advisers being bad and investments being expensive,” said George P. Fraser, managing director at Retirement Benefits Group LLC. “We spend 50 days a year with these employees, helping them. I find it offensive when I think of the days my team spends sitting down with workers who are making less than $30,000 a year.”
Much of the work behind being an effective adviser to a retirement plan is helping workers get their savings rates up and ensure that they’re taking advantage of the saver’s tax credit, he added. Education is also a large part of what these advisers do, Mr. Fraser said.
Employee guidance doesn’t come for free, noted Bo Bohanan, director of retirement plan consulting at Raymond James Financial Inc.
“The most ironic thing is that the first part of the video keyed on these participants who need advice,” he said. “They want to cut the adviser out, yet they need advice.”
Others applauded the aim of the video but noted that there were other shortcomings.
“I wish there were more discussions on the adviser space and what fiduciary advisers are doing, but I get that we’re only a subset of a broader space,” noted Michael Kitces, partner and director of research for Pinnacle Advisory Group Inc. “I’m upbeat on seeing a lot of the issues on 401(k)s getting exposed a little more.”
Still, he feels that the video conflated “people’s personal problems with industry problems.” For instance, the documentary highlighted tech company workers whose retirement savings were largely stashed away in company stock and who ended up losing close to everything after the tech wreck in 2000.
“There is a need to look at the problems that the industry has triggered, versus the fact that some people don’t make good decisions,” Mr. Kitces said.
A negative spotlight was also cast on the use of actively managed mutual funds in 401(k)s, which come with a heftier price tag for participants, and the payments brokers receive for recommending them.
“They’re saying, ‘Why should I distribute your funds unless you pay me to?’” John Bogle, founder of The Vanguard Group Inc., says in the program. “’You get these big management fees — I want some of it. You’re getting plenty. Give me some.’” He sings the praises of cheap index funds, drawing up a hypothetical example of a fund that charges 2% in fees and an average 7% annual return. Mr. Bogle notes that over the course of 50 years, the fees will devour two-thirds of an investor’s savings.
That’s one of the stickiest issues for advisers.
“I’m in the camp that believes there is value in active management and that we shouldn’t eliminate it,” Mr. Kitces said. “I’m a supporter that low-cost index funds should be an option in every 401(k) plan and that they should be the default. But if people want to go out of their way to choose an active manager that adds value, then that’s their right to do so.”
Jude Metcalfe, president of DST Retirement Solutions and president of The SPARK Institute Inc., a provider advocacy group, noted that the film misses the larger point: Workers’ inability to save altogether is the real problem.
“The real crux of this issue is that there is no incentive to get people to save money,” he said. “If we don’t get people to save, it doesn’t matter what they invest in.”
Still, the video has fans on the fee-only advisory side.
Denise Wilcox, a fee-only adviser at Wilcox Advisors Inc., said people need to be aware of the conflicts of interest brokers have with their clients, particularly in the 401(k) space.
“People don’t know the difference between how brokers are working under a standard of suitability and advisers are working under the fiduciary standard of care,” she said. “I think every investor should watch this.”
Darla Mercado covers life insurance, annuities and retirement products for InvestmentNews, and she’s looking for advisers’ informed opinions, plus chatter on products and other industry developments. InvestmentNews reporter Jason Kephart contributed to this story.
InvestmentNews is a trade publication for investment advisers and money managers. It’s published by Crain Communications, and is affiliated with Pensions & Investments, which is another trade journal for large institutional investors.
My takeaway
My personal opinion on this controversial topic is that the Frontline program contained mostly truth, but also went a little too far in placing most of the blame on the advice industry. The reaction from the industry has been more disingenuous. Their argument seems to be that there’s nothing wrong with charging hefty fees as long as the advice is good and the service quality is high. That’s a fair point, but in my judgment the size of the fees is excessive in many cases.
The truth of the matter is that the advice industry insinuates that they are able to add value by “beating the market.” But the data shows that this is not the case. Most investors would be better off if they put their money into two or three low-cost, broadly diversified mutual funds or ETFs, and pocketed the fees.