There were several interesting and related articles from the last few days that could make for an interesting discussion.
First is an article by Helaine Olen for Salon titled 401k Are A Sham. Olen has done a lot of writing that is very critical of many aspects of the financial services industry related to products and services.
She notes that the US is “on the verge of a retirement crisis” as living standards appear to be declining such that many people will not have it better than their parents and she places a lot of blame on the 401k vehicle. Olen quotes Teresa Ghilarducci about the coming “abyss.”
Part of the equation is fees which she touches on and also cites the desperately low average balances in 401ks. Olen talks of blame pointed at individual for not saving enough but makes the argument that saving money has become too difficult for people on an economic basis.
I am not sure if there was an implication that pensions are better for people or not but if there was, the economics of those would appear to not be sustainable, on a broad scale anyway.
Missing from the article was any discussion about what to do. Olen is at least partially correct on most if not all of her points. Products are often expensive, there have always been financial professionals who have hurt people either through incompetence or unscrupulousness (see below for more on that) and that will probably always be the case.
Olen educates on what is wrong but the more important discussion is what to do about it. The complexities of administering 401ks (I have an inkling, not a thorough understanding) are far more than would make intuitive sense and unfortunately it is not as simple as letting everyone open a PCRA at Schwab (PCRA=personal choice retirement account which is essentially a brokerage account).There’s various levels of oversight required and time spent by people required that I would be shocked if meaningful progress were made anytime soon. I am not defending this, simply stating an observation of how it is.
As far as the industry blaming individuals for not saving enough, I won’t disagree with her necessarily but would say, as I have many times before, that savings rate is the thing most within individuals’ control. They have more control over lifestyle choices than they do over market returns and 401k fees. Yes, people may not have control over certain lifestyle choices but you do have a better chance controlling that than you do anything to do with markets or fees.
The other point to make in response to the blame game (again, I don’t deny the sentiment exists) is that no one cares more about your financial future than you do (I attribute this quote to Joe Moglia but maybe someone else said it first?) so to me this is about looking after yourself, not waiting for someone else like the government to bail you out.
And while much might be wrong, the industry does provide the tools to help yourself engage in markets more cost effectively through low cost brokerage firms using exchange traded products and the internet provides the opportunity to learn how markets work, how behavior can work against the desired outcome and every other detail that could be reasonably thought as being an important ingredient to financial success.
This includes simple accounts, strategies and products. This article from Bloomberg gives a rundown of examples where individuals were hurt by commission-rich, complex products; mostly non-traded REITs and annuities. RIA-managed portfolios consisting of a few exchange traded products (both equities and fixed income) and few individual issues (both equities and fixed income) where the only commission is $7 or $8 going to a brokerage firm should be better able to avoid the pitfalls isolated in the Bloomberg article. The RIA will still have to account for performance and of course this model won’t solve stupidity but the financial professional will have a much easier time if they never have to explain why something had an upfront 7% sales charge.
This issue of simplicity is not limited to the RIA world. Here is a lengthy article about the Yeshiva University endowment which blew up when it increased its allocation to hedge funds.
The opportunity to overcome all the obstacles cited by Olen exists but requires the resourcefulness to learn how, stick to it and adapt to any surprises that come. As an advisor, your clients are counting on you to help them through this even if they don’t spell it out as such and someone choosing to do this on their own; well it’s bootstrap time.
This article was written by AdvisorShares ETF Strategist Roger Nusbaum.