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 The fact is the $15 trillion fund industry no longer is struggling, and 12(b)-1s are an outdated compensation scheme.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.
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.