Saturday, April 25, 2009
Famous Last Words
“It was a gray, chilly morning in midtown Manhattan and a line of unemployed, mostly white-collar workers, stretched for blocks around the Radisson Hotel. More than 1,000 middle managers, stockbrokers, consultants, secretaries and receptionists had come hoping to find a job. It was called a career fair, but there was no merriment - only a whiff of desperation.”—Intro to “60 Minutes” segment, “401(k) Recession.”
By now, you have no doubt either watched, had recommended to you, or at least heard about the “60 Minutes” special that ran a week ago Sunday. If you haven’t watched it yet, you should. Forewarned is forearmed, as they say.
No, it wasn’t very long (less than 15 minutes), but it was certainly enough to fuel the fires of those who are anxious to put the 401(k) out of our misery. Short as it was, you could basically cleave the segment into two propositions: that retirement savings shouldn’t be invested in stocks (or least not so much in stocks), and that fees—and hidden fees at that—are at least as much to blame for the decline in balances as the markets. Oh, and the real culprits—the ones that created the 401(k) and convinced employers to shed their commitment to pensions—are the same ones that have been fleecing all of us for decades. Well, at least we know who to sue.
The realities are, of course, more complicated than you’ll get in a 12-minute TV segment— particularly one that spends most of that time hanging out in a job fair with a long line of the unemployed who, for reasons I have yet to discern, showed up at that job fair with their 401(k) statements in hand.
That made it possible for one interviewee to share that he had lost $140,000 (of course he hadn’t opened his statement until he was on camera)—though to lose that much he doubtless had the size balance many participants can only dream of. Another woman was able to illustrate her plight by pointing to a chart on her 401(k) statement—a chart that showed a steep increase from 2005 through 2007, before dropping just as sharply—to a point that, to my eye, seemed to be just about where 2005 started.
Now, nobody likes the idea of losing two years of savings and market growth, and it’s not that I don’t have empathy for their situation. I’m on the far side of 50 (albeit barely), after all—and my 401(k) statement isn’t looking any healthier than theirs. Of course, the “60 Minutes” crew was focusing mostly on folks who were un- or under-employed, and that not only hinders their ability to save, it could also mean that they’ll have to dip into those already-depleted savings.
When all is said and done, no one (except maybe “60 Minutes”) seems to be trying to argue that the 401(k) is “enough,” or that it was ever designed to be enough(1). Frankly, the only way it could be is if we mandate not only coverage, but participation, and participation at a rate of deferral that many workers would find prohibitive (unless, of course, you adopt some of the “pooling” aspects of Social Security). But let’s be honest—even with those pooling aspects (and a mandatory withholding of nearly 13% of worker pay), Social Security isn’t exactly on sound financial footing(2), and even defined benefit plans that were in solid financial shape two years ago—well, now aren’t.
More insidious were the claims about the impact of fees, and on that count, IMHO, the industry—specifically the mutual fund industry—has no one to blame but itself. Sure, the fees—well, at least the fee rates—well, at least most of them—are “disclosed” in the prospectus. Those kinds of disclosures may work for the lawyers, but they’re not much help to your average participant: “Where would you find it? Where would you find these fees in this prospectus? You can look on any page you want, and when you're all done reading it, and you will find some of the fees and the commissions here, but you won't find them all, and I'll bet you won't find half of 'em," Congressman George Miller (D-California), Chairman of the House Education & Labor Committee, told “60 Minutes.”
Moreover, in the “60 Minutes” segment, it was said “Miller's committee has heard testimony that they can eat up half the income in some 401(k) plans over a 30-year span.” HALF the income? I can understand that SOME investment funds with particularly low returns and SOME retirement plans with particularly high fees could create the potential for that situation, but….
Therein lies the problem, of course. There are so many rumors and innuendos running around about 401(k) fees—what and how much is being paid, who it’s being paid to—and the rumors are all about how it’s all too much, and to people who aren’t doing anything to actually earn it. Rather than counter these accusations with the facts, many in the industry continue to hide (or appear to hide) behind the shroud of “we can’t.” You know the litany: “we can’t” tell participants how much they are paying because it’s too complicated to explain, or “we can’t” tell participants how much they are paying because it will cost too much to tell them, or “we can’t” tell participants how much they are paying because they won’t look at it anyway.
I don’t doubt the realities of the last two points, and the costs of complying with proposed disclosures by the DoL—less onerous than those contemplated by Congressman Miller—are staggering (3), but once you have cracked the mantle of trust, it’s hard to shake a sense that the real reason “we can’t” tell you what they are taking from your account is that they have something to hide (4).
Having been on that side of things, I know how complicated it can be to provide those disclosures —and having worked and communicated with plan sponsors and plan participants for most of my adult life, I also know how unlikely many are to be attentive to those disclosures that may be so costly to provide (5). Still, no one is well-served by what appears to the average participant (or congressman) to be an enduring reluctance to provide a straightforward answer to a perfectly legitimate question: “How much money are you talking from my account?”
If the retirement plan industry doesn’t come to terms with that reality—and quickly —well, “we can’t” might be someone’s famous last words.
—Nevin E. Adams, JD
The 60 Minutes segment is online HERE
(1) see “IMHO: ‘Broken’ Record”
(2) see “Vanishing Points?”
(3) see “IMHO: ‘Know’ Way”
(4) see “IMHO: No One (Else) To Blame”
(5) see “IMHO: What Will Participants Do?”