How to Take the ‘Gamble’ Out of Retirement Planning

The financial services industry has plenty of reasons to look at 12(b)-1 fees—especially when it comes to the need for client-friendly arrangements

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In case you missed it, the PBS show "Frontline" recently ran a segment titled “The Retirement Gamble.” The well received documentary has created quite the stir.

The program attacked America’s current retirement system, which it argues, is plagued by high fees, a lack of fiduciaries, and lots of market underperformance.

“Big banks, brokerages, insurance companies and other financial service providers operate under something called a suitability standard — which says they don’t have to give you the best advice, just advice that isn’t too egregiously terrible,” says Martin Smith, correspondent.

With more than 72 million participants and over $3.5 trillion in assets, the 401(k) marketplace is what many Americans use to save and invest for retirement. How can the current system be improved?

Better Fee Transparency

I believe financial professionals deserve to be paid for their work, however, 12(b)-1 marketing fees is the wrong way to do it. Although these fees paid by fund companies to financial intermediaries (brokers) are fully explained in the prospectus, people still don’t realize they are paying them. And that’s a huge problem.

According to “The Retirement Gamble,” six out of 10 Americans still don’t know how much their 401(k) plans are costing them. Regrettably, 12(b)-1 fees, when it comes to full disclosure, do not err in favor of lazy retirement savers who never open the prospectus.

Back in the early 1980s when 12(b)-1 fees were first introduced, the whole point was to help the struggling mutual fund industry to grow and to defray its burdensome market costs. The fact is the $15 trillion fund industry no longer is struggling, and 12(b)-1s are an outdated compensation scheme. Although the mutual fund industry has resisted ETFs inside 401(k) plans, the truth is that ETFs aren’t fettered with 12(b)-1 fees, which goes a long way toward solving the problem of opacity.

Better Regulation

It’s been almost eight months since 401(k) fee disclosures become mandatory, but the new law has done little to help plan participants have a better handle on fees. Has more regulation failed us?

A recent AARP survey found that 70% of mutual fund savers were not even aware that they were paying any fees at all.

Some 401(k) participants, according to various reports, still aren’t able to accurately estimate how much in 401(k) fees they pay because of lengthy disclosures along with investment jargon they don’t understand.

Plus, employers or 401(k) sponsors are being tortured with half-baked 401(k) rules. All of this is a big time waster, particularly for resource strapped small businesses. 

If this was the federal government’s idea of helping the public, it’s not working.

For that reason, the Department of Labor's Employee Benefits Security Administration (EBSA) should immediately get to work on version 2.0 of 401(k) fee disclosure rules.

Remember: Less is more, and simple is better.    

Better Education

Scapegoating the financial services industry is easy and fun. Do they deserve 100% of the blame? Inadequate regulation has certainly contributed its fair share to the retirement gamble. And what about the investing public? Shouldn’t they accept at least some personal responsibility for their own retirement future?

People who refuse to be educated, refuse to read the fine print, and who refuse to save and invest have nobody to blame but themselves when they wind up in the poorhouse. Yet, for movie producers to overlook this obvious fact is a pitiful shame.  

Finally, to insinuate the financial services industry is exclusively to blame for the public’s ignorance in retirement planning is sending the wrong message. We must tell the public they hold the key to their own financial future, rather than reinforcing an adolescent view that others are to blame when things don’t go as planned. Education and a realistic view of money are essential.

Summary

If everyone – from financial professionals, to regulators, and even retirement savers – does their part, saving and investing for retirement won’t be a gamble. But sadly, I’m willing to bet not everyone is yet ready to do their part. 

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