Column: Gambling with your retirement: PBS gets in on the action
CHICAGO (Reuters) - PBS Frontline is shocked - shocked! - to find that investors hold retirement accounts that cost too much and eat into long-term returns, even though financial experts have been hammering away on these issues for years
The public affairs show turned its investigative eye to the financial services industry this week with "The Retirement Gamble."
The program is an expose on the two biggest flaws in 401(k) accounts and the rest of the self-directed retirement savings marketplace: high investment fees that sap long-term returns, and conflicts of interest that allow financial services companies to stock those plans with products that earn the most money for them, rather than what's in the best interest of unsuspecting investors.
PBS did a real public service in highlighting these problems for a broad television audience, even though there was little news for those of us who have been talking about these issues for years.
Millions of Americans hold retirement investments that cost too much and eat into their long-term returns. And they have no understanding that far too many plan "advisers" have a conflict of interest between what's best for the investor and what's best for the adviser's own bottom line.
Here's the latest evidence on conflict of interest - and it's a statistic you didn't hear on Frontline. A study released in January of thousands of 401(k) plans found that mutual fund companies administering 401(k) plans are three times less likely to drop their own poorly performing funds from investment menus than they are when a fund is run by a competitor.
Most workplace plans these days are what is known as "open architecture." That means they offer not only proprietary funds from the financial services company that administers the plan, but also from competing firms. In this study, a trio of academic researchers explored what they call a "favoritism hypothesis" about the companies that run 401(k) plans for employers. They analyzed 401(k) menus of 2,645 plans from 1998 to 2009.
The home-grown funds in question underperformed by 3 percent on a risk-adjusted, after-fee basis. That may not sound like a big gap, but it's huge when compounded over decades of retirement investing. "If you lose 3 percent per year, over the lifespan it can add up to a really huge number," says Veronika Pool, co-author of the report and an assistant professor of finance at the Indiana University Kelley School of Business.
Are workers forced to invest in those funds? Of course not. But many plan menus force participants to navigate dozens of choices - an average of 25, research firm Brightscope reports - and Pool's analysis turned up no evidence that investors are able to weed out losers when they pick funds.
The favoritism hypothesis addresses today's hottest regulatory fights in the financial services industry: should all the people offering investment products have fiduciary responsibility - that is, requiring them to put your best interests ahead of their own?
The battle is being fought on two fronts: At the Securities and Exchange Commission, which regulates stockbrokers and broker-dealer representatives, the U.S. Department of Labor, which is expected to propose tougher fiduciary responsibilities this summer for anyone who provides advice to workplace plans.
Investment cost is the other key issue raised by Frontline - and it caused the most squirming by Wall Street execs who went on-camera to bravely defend high-cost actively managed funds.
The evidence is clear that simple low-cost index funds, which serve as a proxy for the entire market or subcategories of it, beat high-cost actively managed funds, almost always. Even Morningstar, the Chicago research firm that makes its living rating fund performance, finds that low-cost funds offer much better returns than high-cost funds across every asset class. In a study of fund performance from 2005 through 2010, the lowest-cost domestic equity funds returned an annualized 3.35 percent, compared with 2.02 percent for the most expensive group.
The industry counters by noting that mutual fund investors already tend to hold lower cost funds with below-average portfolio turnover. Research from the Investment Company Institute, a fund trade group, shows the average total expense ratio among 401(k) investors in equity funds last year was 0.63 percent. But that's the average, which means some investors are in funds far higher than that number, while index fund investors often pay 0.20 percent or less.
"Employers and participants can seek out lower-cost funds because the 401(k) market is highly competitive, with many types of providers, including index funds and actively managed funds, vying for market share," said an ICI spokesperson.
Many top-rated 401(k) plans already offer simplified menus and stress low-cost index funds - something that Frontline omitted. A growing number of plans also are adding independent third-party financial advisory services that offer reasonably priced investment guidance.
Those advisers are fiduciaries, but workplace retirement savers should understand that the financial services companies providing the plans may not be. So, it's a buyer beware situation. All workers now receive detailed information about mutual fund fees in improved quarterly reports from plan sponsors, as mandated by new Department of Labor rules.
If your plan offers low-cost index funds, use them instead of active funds. If it doesn't, ask your plan administrator - why you don't have those plans on the menu.
Also ask if the plan offers a "brokerage window" - an option that allows you to buy and trade whatever stocks, mutual funds or exchange-traded funds offered by your plan's vendor. The privilege typically comes with an annual fee around $150, but that price can be more than offset if you shed high-cost funds in your plan.
And do catch "The Retirement Gamble." If you missed it, it's available online at to.pbs.org/12GLyi2.
For more from Mark Miller, see link.reuters.com/qyk97s
(The writer is a Reuters columnist. The opinions expressed are his own.)
(Follow us @ReutersMoney or here. Editing by Linda Stern and Steve Orlofsky)
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