On April 23rd, PBS ran an episode of its “Frontline” program entitled “The Retirement Gamble,” which it touted as an “eye opening investigation of a financial services industry that may be draining your retirement savings with every passing year.” The core thesis of this documentary — or perhaps more accurately, docu-drama — is that for retirement savers, fees are by far the most important factor to be considered when choosing an investment.
The program’s general sentiment is that essentially everything else provided by the retirement savings industry to participants has little value. In other words, the industry is nothing more than a commodity — like concentrated orange juice, for example. (The link is to an explanation of the climactic scene in the 1983 Eddie Murphy/Dan Aykroyd film, Trading Places, in which the protagonists attempt to manipulate the futures market.)
“The Retirement Gamble” conveniently ignores all that it takes to help working Americans save for a dignified retirement. We all know it’s not that simple. First, it starts with a plan, because without a retirement plan at work, people don’t save. Fewer than 5% of individuals making between $30,000 and $50,000 save on their own, compared with more than 70% of those same earners with access to a workplace retirement plan.
So how do employees get access to a retirement savings plan at work? Here is what it takes:
• The employer, especially a small business, needs to be convinced about the value of having a plan.
• Then an advisor has to help the employer choose among the different types of plans and decide which benefits to provide.
• Then the plan has to be set up and investment options selected.
• Then the advisor has to convince employees to participate in the plan — and then help them determine how much to save and how to allocate their savings among the plan’s investment options.
• Finally, the plan has to be administered in accordance with ERISA, which in case you were not aware, is pretty complicated — including comprehensive participant disclosure rules, which "The Retirement Gamble" devoted a grand total of 10 words to.
All this doesn’t happen by magic. There’s a significant value proposition associated with these services, and, yes, a cost as well. It’s not only — nor should it be only — about fees. If you were having trouble with the law, would you simply look for the cheapest lawyer? Certainly not. And when it comes to something as important as your retirement savings, you shouldn’t base a decision solely on cost either.
Perhaps this is the retirement plan industry’s own fault. With the advent of fee disclosure, we have been so busy competing aggressively on fees (see, for example, a certain TV ad featuring a toddler with a smartphone app) we haven't been focusing enough on the critical value proposition the industry provides. If we don't do that ourselves, how can we expect our critics to focus on anything but fees?
Nothing in the history of this country has promoted more savings by average Americans than the 401(k) plan, with total assets in excess of $4 trillion (plus over $5 trillion in IRAs, much of which came from 401(k) rollovers). Three-quarters of American families first became investors through their workplace retirement plan. It’s hard to imagine where we would be without our nation’s private retirement system.
This is not to suggest that the system is perfect. We need to expand coverage to those without a plan at work. We need to make it seamless for workers to save through greater utilization of auto-enrollment. And we need to make sure we focus on outcomes so the system produces the retirement results reasonably expected by both plan sponsors and participants.
If the retirement plan industry continues to innovate and deliver on these promises, the value proposition that is provided will be self-evident. Retirement plan services are not a commodity — and ultimately it’s up to the industry to show this.
Brian Graff is the executive director/CEO of ASPPA and NAPA.