What's 'Eating" 401(k) Haters?

 Another week, another Bloomberg op-ed bashing 401(k)s—but this time the target is fees—and advisors.

The most recent “shot” is found in an article[i] titled “401(k) Fees Are Eating Your Retirement Savings.” The author, one Ethan Schwartz,[ii] without citation (beyond “various estimates”), tosses out claims as to the “average” fees in 401(k)s (and we know the value of “average” in such matters), states that those fees are “much higher” for then claims to know of “annual expenses well under 0.1%, and often near zero, offered by widely available stock and bond index funds and ETFs in many flavors and stripes outside of 401(k)s”—and then does the math to show how much it all adds to individually, and then he extrapolates it to the whole universe of 401(k) savers to assert that “more than $20 billion annually” is being “taken” from the nest eggs of retirement savers.

Better still, he cites the example of a “close friend” who asked for his help—only to find that “the plan offers a menu of high-priced (and underperforming) actively managed vehicles. Its only index-tracking choices are expensive “collective investment trusts costing about 0.5% more than index mutual funds and ETFs.” Oh, and he also cites as “even more outrageous” the reality that those trusts allow for securities lending (which doesn’t cost the plan money, and in fact probably offsets fees with income).

As unlikely as his generalizations seem to match the 401(k)s I know, it’s impossible to pick apart his portrayal of facts because—the individual situation notwithstanding—they are gross generalities. Not that that dissuades him from offering a “solution”—to “simply eliminate 401(k) intermediaries,” and to “let American workers save for retirement using their choice of designated, IRA-like accounts offering the same, cheap index-tracking funds and ETFs available outside of retirement plans.”

Unlike the other proposals cheered of late, he’s willing to leave the “other incentives that encourage Americans to save through their 401(k)s” intact, “including preferential tax status, employer matching contributions and enrolling employees by default.” He touts as “added bonus,” that “employers would no longer have to spend time and money establishing and monitoring their own, costly 401(k) plans. And employees of small businesses would no longer face a cost disadvantage vis-à-vis the plans offered by large firms, as they do today.”

Now, he anticipates “howls of opposition from the investment management industry,” and—along with a perspective of the industry that seems woefully out of date, he cites the work of none other than Yale Law School professor Ian Ayres and University of Virginia law professor Quinn Curtis. You may remember these guys—and the “love letters” from Yale. Their academic pedigree notwithstanding, these are the guys who used outdated (and limited) Form 5500 data and questionable expense assumptions to make wild accusations about 401(k) fees and the plans that offered them. Accusations that, it bears reminding, were subsequently disavowed by Yale University’s Law School. 

In fact, actual fund data continues to show declining fees among 401(k) plans. It’s not that you can’t find outliers—perhaps even this writer’s colleagues’—but that’s clearly the exception, rather than the rule. In fact, the Investment Company Institute reports in “The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2019” that 401(k) plan participants investing in equity mutual funds incurred an average expense ratio of 0.39% in 2019, compared with 0.42% in 2018 and 0.77% in 2000. 

Like so many others who opine from ivory towers far removed from the front lines of workplace retirement plans, this author blithely assumes that workers don’t need the education, encouragement and financial support of employers and advisors. He ignores (or perhaps is simply unaware) of the data that shows how workers of even relatively modest means are 12 times more likely to save in their workplace retirement plan than on their own.[iii]  

Today they’re also well-served by a growing number of automatic enrollment designs to help them get started, a steady increase in the default savings rate, and acceleration in that rate over time, not to mention the expanded availability and utilization of qualified default investment alternatives—enhanced designs that are not only continually finding their way “down market,” but that it seems fair to say are largely due to the involvement and engagement of those savings “eating” intermediaries he characterizes as “largely superfluous.”

What exactly is (still) “eating” 401(k) haters?

Why, instead of looking for ways to undermine a system that works, or pushing for incentives to extend those benefits to everyone—do they seem bound and determined to put those retirement savings on a “crash” diet?

- Nevin E. Adams, JD

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[i] Bloomberg News editorials have been on something of a tear of late; you’ll also want to check out An Article that Doesn’t Make Much Sense and Chiseling Away at the 401(k)… 

[ii] According to Bloomberg, Schwartz has worked as an investment manager and financial services executive for 21 years. He was a special assistant to the deputy secretary of the Treasury in the Clinton administration.

[iii] Vanguard, How America Saves 2018 (DC plan participation), EBRI estimate based on 2014 IRS SOI tabulation (IRA-only participation).

An Article That Doesn't Make Much Sense...

For reasons that elude me—other than perhaps because it has a “click bait” headline—the folks at Bloomberg recently published an “op-ed” titled, “401(k) Plans No Longer Make Much Sense for Savers.” Sadly, it’s gotten some attention, aided and abetted even by industry publications, some of which incredibly reported on it as a straight news item. 

Much as it pains me to give more “oxygen” to this, the author, a “former risk manager” (he now apparently writes books), basically makes a tax argument. His essential premise is that once upon a time, the tax benefits of 401(k) made that investment worthwhile, but that tax rates have dropped, and they’re not likely to be lower in the future, so you’d be better off taking that money and investing it elsewhere (more on that in a minute). Oh, and he wants the federal government to forego its deferred taxation on those 401(k) monies so that you can pull that money out and invest it elsewhere without pause (we’ll not hold our breath waiting for that one).

There are many issues with this former risk manager’s perspective on 401(k)s—not the least of which is that his primary argument is based on tax rate data that appears to be both flawed and skewed to exacerbate the impact (picking both the highest and lowest tax rates, depending on the point he’s trying to make). Then, as is the case with many mathematical “arguments,” having predicated his case on a flawed assumption, he “just” does the math—producing a result that is mathematically accurate but distorted. 

But, for the sake of argument, let’s concede that tax rates are lower now than in 1980, and may well be higher that they are today in the future. The true myopia in his argument lies with his apparent lack of understanding of the 401(k) he so blithely dismisses.

401(k) Fables?

Part of his purported “fix” for 401(k)s in this changed tax environment is to make new contributions and accumulated returns from them tax-free when withdrawn in retirement (albeit only by below-median-income households), ostensibly to help provide relief against fears that post-retirement tax rates will be higher than today’s—though it seems primarily designed to encourage the flow of funds from the 401(k) to IRAs. Perhaps someone should alert him to the Roth 401(k)—a feature that some two-thirds of 401(k) plans already make available to workers. 

And then he suggests that in 1980, a “typical” investor would have paid about the same whether savings were in a 401(k) or an IRA, 3.5%—which suggests to me that he had no experience with either. 

Moreover, while he (grudgingly) concedes that 401(k) fees have declined since then (though he will only admit to 1.5%, and manages, in a passing comment, to note that “others are stuck around the 3.5% level,” inferring that is still commonplace), he actually opines that a stand-alone IRA investment is a better deal, with fees of 0.5%. Again, one has to wonder where he is finding that “stuck” 401(k)—not to mention that bargain retail IRA.

Match Less?

And that’s not the only 401(k) feature of which he appears woefully ignorant. Perhaps his fixation on tax rates blinds him to a significant advantage of 401(k) plans; that while workers doubtless appreciate the ability to postpone paying taxes on the pay they’ve not yet taken, that doesn’t seem to be a primary motivation for their participation. 

More likely, and yet completely ignored in his “analysis” is the impact and incentive of the employer match. A match which, according to the most recent Plan Sponsor Council of America survey, is at record levels. Try getting that in your retail IRA. 

Moreover, his affinity for IRAs also seems woefully misplaced in view of data that has established that even modest income workers are 12 times[i] more likely to save when they have access to an employer-sponsored plan than left to their own with an IRA. 

What’s The Point?

In view of all this contradictory evidence, one might well wonder why a published author and former risk manager would choose to simply ignore it—and then, based on half-baked assessments, draw conclusions that 401(k)s have outlived their usefulness. 

It’s entirely possible, of course, that he’s been living under that proverbial rock, that he’s completely missed a generation worth of innovation, that he’s oblivious to the realities of behavioral finance, that he’s never actually participated in a 401(k) nor benefited from the encouragement of an employer match. 

Or maybe he’s one of those who would use the visibility of a posting in a reputable publication to lend credibility to an argument that is, at its heart, clearly designed to encourage hard-working Americans to pull their money out of the shelter and support of that 401(k) plan…

Regardless, it’s a non-sensical article that doesn’t make much sense for savers… or anyone else. 

- Nevin E. Adams, JD

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[i]Vanguard, How America Saves 2018 (DC plan participation), EBRI estimate based on 2014 IRS SOI tabulation (IRA-only participation).

The "Plot" Thickens

In recent weeks, I have been distressed to see a pair of reports by what are sometimes affectionately referred to as 401(k) “haters” — but that’s not what I find most troubling.

One, by the Economic Policy Institute, is innocuously titled, “The State of American Retirement,” but it might be more honestly subtitled, “How 401(k)s have failed most American workers.” The other is a formalized (and slightly updated) version of Teresa Ghilarducci’s Guaranteed Retirement Account (GRA) proposal titled, “A Comprehensive Plan to Confront the Retirement Crisis.” Both reports tread familiar, and misguided, ground.

Misguided and misleading as these kinds of reports are, they’re not new or even original. I’d almost be inclined to simply ignore them. That is, until I see headlines like, “The Plan That Could Render Your 401(k) Obsolete,” or “These Depressing Charts Show the Different Ways 401(k)s Fall Short,” reported with a straight face by the personal finance press. The latter, which just appeared in The Washington Post, leads off with the assertion, “We already know that the 401(k) has not been a great solution for improving Americans’ retirement security.” Oh, do we?

Here’s some data that (somehow) is overlooked by these reports: According to the nonpartisan Employee Benefit Research Institute (EBRI), in 2013, 82% of 401(k) participants (for whom this information was available) made less than $100,000 per year, and 51% of 401(k) participants made less than $50,000. Even more importantly, moderate income workers participate when they have the option: More than 70% of workers earning between $30,000 and $50,000 save in their 401(k). Oh, and the notion that “less than half of American workers have access to a retirement plan”? Well, the fact is that 8 out of 10 full-time workers are eligible for some kind of workplace retirement plan, the most common of which is a 401(k)-style plan. The 50% statistic cited repeatedly by academics and the media includes seasonal and part-time workers — granted, they have a retirement to worry about, but their issues in the here and now are economic, not a fault of ERISA or the 401(k), which have long had specific coverage thresholds.

It is, as a colleague of mine said recently, blaming the well for the drought.

The failure laid at the feet of 401(k)s — if a failure it is — is that people who don’t work, or who don’t work for employers who offer a retirement plan at work, are in worse shape than those who do. Now, I’m not saying that the 401(k) design works for everyone, and it most assuredly won’t work for those who don’t have access to its benefits. That said, 401(k)s are working for far more people and in far more varied circumstances than the fear-mongering headlines give them credit for. It’s one thing, after all, to acquiesce to what has become a journalistic “creed” — that “if it bleeds, it leads” – and something else again to wield the knife.

It’s past time to call out these reports — and the reporting on them — for what they really are: part of a long-standing and deliberately intentioned “plot” to kill the 401(k) — first by undermining its value, discounting and demeaning the modest tax deferrals that encourage American savers to put aside their natural preferences for spending, then discrediting as “rich” those who do take advantage of the option and make thoughtful preparations for retirement, and then, as advisors well know, disparaging those who work with retirement savers to make good long-term decisions.

It’s been said that, “A lie unchallenged becomes the truth.” If those of us who know better don’t start speaking up — and speaking out — you can bet that the drumbeat of coverage about the failure of the 401(k) will one day become a self-fulfilling prophecy. For some, that day has already arrived.

- Nevin E. Adams, JD