Fred Leamnson, Leamnson Capital Advisory, LLC, Reston, Va.
PBS’s documentary series Frontline has aired two specials on retirement programs offered by U.S. corporations. Both Can You Afford to Retire? and The Retirement Gamble attempted to educate viewers on problems with the current retirement system. While certainly thought-provoking, they didn’t fully address the solutions to perhaps the biggest problem facing people saving for retirement: a lack of investment education.
Both programs covered some of the big issues facing people saving for retirement. The program Can You Afford to Retire? pointed out that employees were increasingly taking on the burden of investing for retirement without getting the knowledge they needed. This was due to the shift away from traditional pensions toward defined contribution plans such as 401(k)s. According to one of the consultants interviewed, retirement readiness for rank-and-file participants lagged considerably behind those in management and the executive suite. Participants in higher-income jobs saved more money and had better investment results than their lower-income counterparts. They tended to be more interested in and have a better grasp of how much they needed to save and how their money was invested.
Another area in which investors seemingly lack sufficient knowledge was highlighted in The Retirement Gamble: the difference in professional standards and practices of those who provide investment advice. Most financial planners adhere to what’s called suitability standard. Under this less-stringent standard, products offered to investors need only be “suitable” for that investor’s risk tolerance, goals and lifestyle. For example, if an S&P 500 Index fund is appropriate for an investor, the suitability standard says any such fund is fine, even if there are cheaper ones available. The other, more stringent and rigorous standard is the fiduciary standard, which requires advisors to act solely in the best interest of investors at all times. Using the S&P 500 example above, whereas an advisor adhering to the suitability standard could recommend a more expensive S&P 500 fund (perhaps one offered by that advisor’s employer), the fiduciary advisor would have to only advise his or her clients to employ the less expensive S&P 500 fund.
In very telling interviews, three executives from the retirement arms of Wall Street firms attempted to defend the suitability standard, justifying it with the same tired, disproven Wall Street language that says it depends on each investor’s personal circumstances, risk tolerance and goals. How are investors better served — regardless of their circumstances, risk tolerance or goals — by a standard that allows advisors the room to put their own interests ahead of their clients? The answer, clearly, is that they aren’t. Yet many investors have no idea there’s a difference.
Combine the above with the lack of transparency and the “hidden fees” passed along to investors by many of the brokerage firms managing retirement plans, and you truly have a recipe for the nerves on display in each program about having enough for the retirement years.
My take on the solutions to the education problem are as follows:
1. The problem with the retirement system isn’t always just about the plan. The quality of advice and education available to plan sponsors and plan participants is usually sorely lacking. Participants need help choosing the investments that will best help them achieve their retirement goals. Employers who offer plans should insist on working with advisors and/or firms who accept fiduciary status for plan investments at the plan level.
2. Access to good advice and education shouldn’t be limited to management and executives. All plan participants, regardless of their position in the company, should have access to advice from someone acting in their best interest. There are plenty of firms out there who can deliver this type of advice for any size company anywhere in the country.
3. The Department of Labor has required defined contribution plans to disclose fees to plan participants, but has offered very little guidance on how to disclose those fees. While a few plans have made their fee disclosures simple to understand, some created disclosure documents up to 50 pages long. How is a long and complicated 50-page document supposed to help educate plan participants on the fees they’re paying? Clear, concise disclosure documents showing fees being charged should help plans sponsors and participants keep their costs lower, potentially helping them keep more of their returns for retirement.
If investors are looking for the education they need to plan for retirement, it’s unlikely they’ll get it from brokers, who simply sell funds and accept no fiduciary responsibility. If plan sponsors would seek the counsel of advisors willing to act in the best interests of their participants, the retirement readiness gap would close over time. Plan sponsors and participants alike deserve nothing less than an advisor committed to acting in their best interest, so they are paying for advice that is sound, not for products that aren’t.
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