Frontline’s The Retirement Gamble, which aired on April 23rd, sheds light on the dark secrets of the 401(k) industry. How high are your plan fees? What are you getting in return for these fees? Is your advisor making recommendations based on what is good for you, or what is good for your advisor? Is your advisor a Fiduciary? (A Fiduciary is obligated by law to put the client’s interests before their own interests.) The documentary suggests that excessively high fees in a 401(k) account throughout the decades of your career could mean significantly less (as much as 63%!) in your account than if you had invested in lower fee alternatives.
The show highlights the millions of Americans whose financial future is uncertain if not downright bleak as a result of bad investment experiences in their 401(k)s over the past two decades. Frontline seems to be blaming Wall Street, their complex products, obscure fee disclosures and inherent conflict of interest for most of this phenomenon. The conclusion from interviews with John Bogle and others is that index funds with rock bottom expenses are the prudent vehicle for individual investors to use in their 401(k) plans. Studies show that index funds outperform their actively managed counterparts over the long run because of their low expenses.
We agree with Frontline and Mr. Bogle that index funds are the right choice for investors in 401(k) plans. However there are other important points that should be stressed. First, 401(k) plans have administrative expenses in addition to the fund expenses that can add significant costs to the participants. Until recently, there was no requirement to disclose these costs. Now there is. In 2012, the Department of Labor introduced new 401(k) fee disclosure regulations which make it easier to address this complex web of costs. However it is up to the employer to make available a low-cost 401(k) with index investment options. If employers make poor choices, employees are left with an expensive plan that will eat into their retirement nest egg.
Second, hidden and excessive costs charged by the financial services industry are not new problems. And there are companies that are addressing them. Founded in 1974, Vanguard is the best known advocate of the “costs matter” philosophy. Vanguard’s corporate structure aligns the company’s interests with the interests of investors. There are also smaller firms, including Wise Planning, that are fiduciary advisors without conflicts of interest and offer low cost 401(k) platforms with low-cost index investments.
Finally, a successfully planned retirement is a combination of spending, saving and investing strategies. It is a fluid planning process that helps individuals to make conscious choices about the tradeoffs they face in life. Navigating these waters requires a level of financial literacy that many participants lack. Financial education is an important component of any 401(k) platform.
We applaud Frontline for highlighting the serious problems in the 401(k) industry and for indicating the benefits of index investing and fiduciary advisors who are required to put your interests before their own. Here are some specific steps you can take to address those issues as well as the others we highlight:
Employers (plan Sponsors)
1. Compare your current plan fees to what they could be. This is a complex task, greatly simplified by our 401(k) Cost Calculator. If you do not know your current plan fees, we can help you find them. Your plan fees are now available to you because of the new 401(k) fee disclosure regulation.
2. Make sure that you have a strong education component in your plan. Many of your employees are confused, overwhelmed and maybe even disinterested in the facts and details inherent in making reasonable saving and investment decisions. They need effective, engaging and objective education that motivates them to take action. Research shows that employees with less financial stress are more productive in the workplace.
1. If your 401(k) investment options do not include an index fund in each of the three major asset categories (bonds, domestic stocks and international stocks), contact the administrator of your plan and ask that those options be added.
2. If you would like help dissecting your 401(k) fees and or the cost of your other financial products and services, or help with addressing the broad question of how to balance your financial life, contact us.
If you haven’t seen Frontline’s The Retirement Gamble , you can watch it here.