Gambling with your Retirement Nest Egg

In April of 2013, PBS Frontline aired a documentary titled “The Retirement Gamble” (available online). It offers a sobering report on the problems with 401(k) type retirement plans in the U.S. and the obstacles facing working Americans in their quest to achieve a secure retirement. If you were already suspicious of the motives of some in the financial services industry, watching this documentary is unlikely to alter your opinion. There have been both vocal critics and defenders of the show. Here are my observations.

At the outset, the filmmakers highlighted the fact that too many Americans including the show’s producer, Martin Smith, have failed to save enough money to maintain even a modestly comfortable lifestyle after they stop working. They offered personal commentaries from those who simply failed to adequately plan for retirement and those who lost their jobs and savings as a result of the recent financial crisis.

In the second part of the show the producers transitioned to the role that financial institutions and their representatives have played in the retirement savings crisis. They unleashed a scathing exposé of the high and opaque retirement plan fees charged by the financial institutions and the conflicts of interest that exist between their salespeople and investors. Although “The Retirement Gamble” focused on workplace retirement plans, the problems of high fees and conflicts of interest which go hand in hand are rampant throughout the investment industry. So, even for those fortunate and diligent enough to be earning and saving sufficiently for a comfortable retirement, the program contains important lessons and has significant implications for their financial futures.

Not surprisingly, the shift in the show’s focus from the responsibility of the investor to save aggressively and invest wisely to that of the financial institutions and their representatives to act fairly and transparently sparked outrage from the financial services community. Their central argument is that: the accusations of unnecessarily high fees imbedded (i.e. buried) in many retirement plans and the conflicts of interest between them and the investors they serve are greatly exaggerated.

This argument is simply not credible. The evidence is overwhelming and the facts do not support their claim. Furthermore those making the claim clearly understand this. It was revealing to watch executives of the firms featured in the documentary looking visibly uncomfortable and struggling to formulate a plausible response when asked by Frontline to explain the obvious conflicts of interest inherent in a system they have fought vigorously to defend. This is the same system that allows their representatives to sell high commission, high margin and inappropriate investments to unsuspecting and trusting investors.

The unfortunate reality is that these firms which represent the overwhelming majority of those in the brokerage, banking, and insurance industries have no legal fiduciary obligation to their clients, which would require them to place the interests of those clients ahead of all others including their own. Instead, they operate on a much lower (so low as to be meaningless)”suitability” standard. Their representatives are commissioned salespeople who are incentivized to sell products, especially the ones that generate the highest earnings for themselves and their companies.

I’ll conclude with two points. First, don’t make retirement planning any more complicated than necessary. There is little doubt that saving more during your working years and controlling spending during your retirement years is the most important factor in achieving a successful retirement. This responsibility to forgo some spending today in order to save for the future falls squarely on the individual, not on the financial institutions. Furthermore tax-advantaged accounts like the 401(k) are powerful tools to build wealth because the investments inside them grow without the drag of taxes. Most working Americans would benefit from taking maximum advantage of these plans. In my opinion, Frontline could have done a better job communicating this in a simple, straightforward way.

Second, successful investing has more to do with avoiding inappropriate investments and building a diversified, low-cost portfolio than trying to identify the next” hot” investment. The program made clear the fact that all advisors do not operate under the same standard of care and the type of advisor you work with can have big implications for your finances primarily as a consequence of the types and costs of the investment recommendations made. The term “financial advisor” is broadly applied not only to Registered Investment Advisors who are fiduciaries and are mandated to place the client’s best interest ahead of all others, but also to salespeople who are not required to operate under such a fiduciary mandate. Under current laws it is again the responsibility of the investor to understand the distinction between the two and select the one who will better serve them. The principle of “buyer beware” is a smart one to follow when seeking financial advice.