401(k) Shenanigans

I came across two interesting pieces on the sad state of the 401(k) industry in the past week. I'll talk about one today, and the other in a future post.

The lead story on last Sunday's edition of "60 Minutes" interviewed people who have lost a bundle in their 401(k)s as well as a main lobbyist for the 401(k) industry. It was interesting in that it really highlighted the fallacies that are trumpeted by both consumer advocates and the financial industry. I'll put my commentary in italics for reference.

On the consumer side, 60 Minutes grilled the lobbyist about the failure of the 401(k) system, asking how it served the 63 or 64 year old who had all their money in stock funds in their 401(k) and now can't retire in the next year or two. Someone is planning to retire in a year or two, and has everything in stocks? No cash or fixed income to lower volatility and provide income for retirement? A reasonable generic benchmark for allocation in retirement, without regard to one's unique individual situation, is half in stocks and half in fixed income. Even if someone used that old overly simplistic, mostly useless rule-of-thumb that '100 - your age is how much you should have in stocks' these people should have had more than half of their money out of the stock market last year.

A retirement plan consultant is quoted as saying the 401(k) system isn't fair to consumers because "the typical 401(k) investor is a financial novice. They don't know a stock from a bond." I don't disagree that 401(k) participants aren't astute investors, but how sorry should we feel for people who don't make the effort to educate themselves about their own financial well-being? Is the person who is obese because of eating fast food every day, does no exercise, and never goes to a doctor a 'victim' when he has health problems?

On the industry side, the lobbyist tried to lie and say that the financial industry is not opposed to fee transparency. When the interviewer called him on it and pointed out that Rep. George Miller (D-CA) hasn't been able to get a fee disclosure bill to the floor because (in Miller's words) he 'felt the full fury of that financial lobby', the lobbyist visibly choked on his words, saying "they want to keep things simple and not not make changes. They like things the way they are." Seriously? THIS is the answer to charges that the financial industry is ripping off working-class Americans - we like things the way they are? And the financial industry pays big money to lobbyists like him to convince lawmakers that the consumer doesn't deserve full disclosure of fees?

Congressman Miller, chairman of the House Committee on Education and Labor, is a staunch critic of the 401(k) industry, especially its practice of deducting more than a dozen undisclosed fees from its clients' 401(k) accounts. He showed the interviewer a prospectus and bet that after reading it the journalist would have found only half of the fees and commissions actually deducted from plan assets. I work with financial data for a living, and I bet I couldn't find all of the fees, either. And this document is supposed to 'protect' plan participants who are doctors, engineers, and tradesmen?

The bottom line is that individuals have to look out for themselves, and we can't complain when the average American spends more time planning their yearly vacation than they do their retirement. At the same time, the information to make educated decisions needs to be made available to regular people, who shouldn't need a degree in security analysis to figure out an investment plan and the costs associated with it.

Kroft, Steve. "Retirement Dreams Disappear with 401(k)s." 60 Minutes. April 19, 2009.