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August 2, 2013
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Editor's note: This article is part of an ongoing AlterNet series, "The Age of Fraud."
“For retirement, the answer is 4-0-1-k,” proclaimed Tyler Mathisen, then editor of
Money
magazine in 1996. “I feel sure that someday, like a financial
Little-Engine-That-Could, it will pull me over the million-dollar
mountain all by itself.”
For this sentiment, and others like it,
Mathisen was soon rewarded with an on-air position at financial news
network CNBC, where he remains to this day. As for the rest of us? We
were had.
The United States is on the verge of a retirement
crisis. For the first time in living memory, it seems likely that living
standards for those over the age of 65 will begin to decline as
compared to those who came before them—and that’s without taking into
account the possibility that Social Security benefits will be cut at
some point in the future.
The culprit? That same thing Mathisen
celebrated: the 401(k), along with the other instruments of
do-it-yourself retirement. Not only did they not make us millionaires as
self-appointed pundits like Mathisen promised, they left very many of
us with very little at all.
You might be tempted to ask “what went
wrong,” but a better question might be “why did we ever expect this to
work at all?” It’s not, after all, like we weren’t warned. As early as
1986, only a few years after the widespread debut of the 401(k) and the
idea that American workers should self-fund their own retirement
accounts based on savings and stock market gains, Karen Ferguson who was
then, as she is now, the head of the Pension Rights Institute, warned
in an op-ed published in the
New York Times, “Rank-and-file workers have nothing to spare from their paychecks to put into a voluntary plan.”
But
her voice, and that of other critics like economist Teresa Ghilarducci,
who is now at the New School and described our upcoming retirement
crisis as “an abyss” in 1994 congressional hearings, were drowned out by
the money and power of the financial services industry, combined with
their enablers in the personal finance media who proclaim even today
that if we don’t have enough money set aside for retirement, it is all
our own fault.
It’s not.
No one less than John Bogle, the
founder of the Vanguard Group, might come forward to declare the
American way of retirement savings “a train wreck” — but no matter. A
train wreck for you and me is a gravy train for the financial services
sector. And in the United States, they are the only group that matters.
Folly, Fees and Frauds
On
their own, the amount of money Americans have put aside for their
post-work lives sounds extraordinary. According to the Investment
Company Institute, the lobbying arm of the mutual fund industry, we had
$20.8 trillion in retirement savings, divided between individual
retirement accounts, defined contribution plans, defined benefit plans,
government plans and annuity reserves.
When broken down to the
individual level, those numbers add up to nowhere near enough money.
According to a recent report issues by the National Pension Rights
Council, the median amount a family nearing retirement has saved for
their post-work lives is $12,000. As for the magical 401(k)? If a
household where the earners are between the ages of 55-64 does have a
retirement account, they barely hit the six-figure mark at $100,000—a
far cry from $1 million we’re told we need.
Yet whether the stock
market goes up, down or sideways, the financial services sector makes
out when it comes to your retirement accounts. How much do they earn?
Astonishingly, we don’t know the answer. In 2008,
Bloomberg
magazine polled a group of pension consultants and came to the
conclusion that 401(k) fees alone totaled $89.1 billion annually.
Ghilarducci, who recently took a more all-encompassing look at American
retirement assets, and included IRAs and pensions in her total, pegged
the number at $500 billion.
The industry gets away with this
because it has what amounts to a captive audience. While there is some
evidence that the recent Department of Labor requirement to reveal
401(k) plan fees to participants—something that was not even enacted
till last year—has brought expenses down, knowledge does not leave
consumers in the driver’s seat. If you discover your company plan is
sub-par — the fund choices are poor, or the expenses are too high — all
you can do is complain to your human resources department and hope they
decide to change plans.
Think of it this way: While we hope our
employers comparison shop when they select a 401(k) retirement plan to
offer their employees, that’s not a given. Employees simply have to take
what is given to them. It’s not like you were shopping for a blazer at
Saks Fifth Avenue, looked at the price tag, and decided to go across the
street to Zara instead. Unless you get a new job, you are stuck.
As
a result, the most benign sounding investments can astonish with what
they charge consumers unfortunate enough to put their money in their
funds. Take the highly popular 401(k) offering of target date funds.
These investments are meant to take the work out of investing, and grow
gradually more conservative with time. Time will tell if this works for
the investor, but it’s already clear it works quite well indeed for the
financial services industry. According to industry estimates, they
generated $2 billion in revenue in 2008, a number that is expected to
increase to $13 billion by 2018.
How do they do it? In part it is
the tremendous growth in assets into the investment class since the
federal government in 2006 began allowing companies to default investors
into them. But it is also their extraordinary fee structure. While the
average fee for any mutual fund is .80 percent, the number for target
date funds is a hefty 1.08 percent annually. Some funds are much, much
worse. Legg Mason’s Target Retirement Series charges 1.47 percent
expense ration for the privilege of taking your money. How do they get
away with it? Well, the industry promotes them as “set-it-and-forget-it”
funds, thereby attracting the sort of investors most likely not to ask
many questions.
And while these numbers sound like peanuts, they are anything but. As the Department of Labor reveals:
Assume
that you are an employee with 35 years to retirement and a current
401(k) balance of $25,000. If returns on your investment in your account
over the next 35 years average seven percent, and fees and expenses
reduce your average returns by 0.5 percent, your account balance will
grow to $227,000 at retirement, even if there are no further
contributions to the account. If fees and expenses are 1.5 percent,
however, your account balance will grow to only $163,000. The 1 percent
difference in fees and expenses would reduce your account balance at
retirement by 28 percent.
And these people are the lucky ones. Half of Americans have no workplace retirement accounts at all.
As
for the claim that those without workplace retirement savings plans can
simply use Individual Retirement Accounts instead? Well, the fees the
industry earns on IRAs puts the 401(k) money into the shade. Brokers not
working in the best interests of their clients make the vast majority
of IRA investment recommendations. Not only is this quite legal, the
financial services industry is actively fighting attempts by the
Department of Labor to change the situation, claiming it would not be
able to afford to offer many low- and middle-income investors advice
under an enhanced standard of care.
Think about this for a moment:
the retirement industry is actually admitting it doesn't have a viable
business model if it needs to put its customers first.
So instead,
the current situation allows for the indiscriminate marketing of all
sorts of financial products as long as they meet the standard of
“suitability,” which could best be described as “okay.”
Nowhere is
this more clear than in the marketing of annuities to the public.
Annuities are among the most confusing financial products in existence.
When
the academic experts discuss the need for Americans to consider
purchasing annuities with their retirement savings so they don’t run out
of money, they are talking about mean immediate or deferred annuities,
that is a product that gives you a guaranteed stipend for life in return
for a one-time payment of money.
But the products that make the
big money for insurance brokers are the infinitely more complicated
variable and equity indexed annuities. These are stock-market based
investments. They come with multiple fees for consumers—and, high
commissions for those selling them.
Not surprisingly, the
combination of consumer confusion and money incentives causes no small
amount of bad behavior by the sellers of annuities. All too many people
are sold annuities they have no business purchasing. There is currently a
case in California where a broker is looking at jail time after being
convicted of
selling an indexed annuity to a woman suffering from dementia. (The case is on appeal.)
I’ve
sat through presentations where elderly audiences are told that Social
Security’s future is “shaky” and “uncertain” and a stock-market based
annuity can protect them from the likelihood of outliving their savings.
Sellers tout the fact that they offer customer consultations at no
charge, but are less than clear about the fees they earn from financial
service and insurance companies for successfully pushing the products.
Reality Check
The
response by the financial service industry to our retirement crisis has
not been self-examination. There has been no attempt to ascertain if it
held out a false mirage to millions of Americans. Instead, financial
hustlers and their media mouthpieces say the fault lies with Americans
who either did not invest their savings properly or don’t don’t have
enough money saved up because we spend too much of it.
This,
frankly, ignores reality. Salaries for the majority of us are, when
translated into constant dollars, falling. The median household is
earning eight percent less income adjusted for inflation today than it
did in 2000. In the first quarter of 2013, wages fell by the greatest
amount ever recorded.
At the same time, costs of things we can’t
do without continue to rise. College costs have tripled since the early
1980s. The amount of money students are borrowing to pay tuition bills
is skyrocketing, and all but doubled from 2005 to 2012 to $1.1 trillion.
Healthcare costs have also soared. The
New York Times recently
reported the cost of giving birth has tripled since 1996. At the same
time, patients are increasingly responsible for ever greater amounts of
their medical expenses: credit reporting agency Transunion recently
claimed an astonishing 22 percent rise in out-of-pocket hospital
expenses over the past year.
People find it all but impossible to
save in this environment. Our national savings rate hovered around ten
percent in the late 1970s and early 1980s. Today, it is a little more
than two percent. Just take a look at what happened when companies began
to adopt automatic enrollment plans for 401(k)s, that is, forcing
people to opt-out of retirement plans instead of filling out papers to
join up. Yes, the number of people contributing to deferred contribution
accounts – but so too did what industry insiders call “the leakage”
rate – that is, people borrowing against or withdrawing the monies in
their accounts (and if that money isn’t repaid, the consumers
withdrawing it need to pay penalties for accessing it). That number is
now close to 25 percent.
The truth is this: the concept of a
do-it-yourself retirement was a fraud. It was a fraud because to expect
people to save up enough money to see themselves through a 20- or
30-year retirement was a dubious proposition in the best of
circumstances. It was a fraud because it allowed hustlers in the
financial sector to prey on ordinary people with little knowledge of
sophisticated financial instruments and schemes. And it was a fraud
because the mainstream media, which increasingly relies on the
advertising dollars of the personal finance industry, sold expensive
lies to an unsuspecting public. When combined with stagnating salaries,
rising expenses and a stock market that did not perform like
Rumpelstilskin and spin straw into gold, do-it-yourself retirement was
all but guaranteed to lead future generations of Americans to a
financially insecure old age. And so it has.
This article was partially adapted fromPound Foolish: Exposing the Dark Side of the Personal Finance Industry.
Helaine Olen, author of
"Pound Foolish," has written for the New York Times, Los Angeles Times,
Washington Post, Salon and other publications. She blogs at
Where Life Meets Money.
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