The stated aim of the Frontline documentary, which aired April 23 on PBS, was to examine how financial institutions protect retirement savings, as well as look at participant-related fees (see “PBS’ Frontline to Air Retirement Plan Documentary”). Critics, however, said it did not capture an accurate snapshot of the American retirement system.
Some sources in the documentary say America’s retirement system weaves a complex web of fees that can drain a participant’s retirement account. An example from Jack Bogle, Vanguard’s founder, shows that if a participant is invested in a fund earning a gross annual return of 7% and he is charged a 2% annual fee by the investment company, over 50 years the participant will have lost about two-thirds of his earnings to fees.
“What happens in the fund business is the magic of compound returns is overwhelmed by the tyranny of compounding costs,” he said in the documentary. “It’s a mathematical fact. There’s no getting around it. The fact that we don’t look at it? Too bad for us.”
But that 2% assumption is overstated, according to Robert Hiltonsmith, whose research was featured in the documentary. Hiltonsmith is a policy analyst at Demos, a public policy organization in New York. Most funds do not charge 2%, but trading costs drive up expenses. “We don’t have a good estimate of what trading costs are because we don’t have that data,” Hiltonsmith told PLANADVISER. “It’s either proprietary or it’s not collected.”
The documentary also points out that many advisers—85%, according to the piece—are not fiduciaries and could be choosing funds for their own benefit.
Joe Ready, executive vice president at Wells Fargo Institutional Retirement and Trust, told PLANADVISER that the documentary missed an important point regarding fiduciaries: Even though all advisers may not be fiduciaries, plan sponsors have a fiduciary duty to act in the best interest of the participants. “When it comes to investment selection and fees for services, that is a fiduciary responsibility of the plan sponsor.”
Regulations like 408(b)(2) and 404(a)(5) have made fees more transparent and easier for plan sponsors to understand. “Fee regulations have helped everybody fulfill that fiduciary role,” Ready said. “Given that first line of defense, the [fee] information is important to know and understand, but it shouldn’t be a key driver in the decision-making process.”
It’s Not Just About the Fees
Brian H. Graff, executive director & CEO of The American Society of Pension Professionals & Actuaries (ASPPA), said it’s not all about fees and contends the documentary painted an inaccurate view of them. “PBS Frontline’s ‘The Retirement Gamble’ program claimed to be an ‘eye-opening investigation of a financial services industry that may be draining your retirement savings with every passing year.’ Unfortunately, the program relied too heavily on a study we debunked when it first came out about a year ago that overstated typical 401(k) plan mutual fund fees,” Graff said in a statement (see “ASPPA Counters Retirement Plan Fee Analysis”).
“What is more troubling, however, is Frontline’s take that fees are by far the most important factor to be considered when choosing an investment, and the retirement industry offers participants little value. In other words, that the industry is nothing more than a commodity,” he added. “However, Frontline conveniently ignores all that it takes to make working Americans into retirement savers. We all know it’s not that simple.”
Although fees exist, they exist for a reason, Graff contends. “There is a significant value associated with these services, and an attendant cost as well. It is not—and it should never only be about fees,” he said. “If you were having trouble with the law, would you simply look for the cheapest lawyer? Certainly not. For something as important as retirement savings, you should not base your decision solely on cost either.”
Graff acknowledged that the system is not 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.”
A Place for Index Funds
In light of fees, the documentary suggests investors are better off investing in broadly diversified index funds than actively managed mutual funds. “Get Wall Street out of the equation,” Bogle said in the documentary. “Get trading out of the equation. Get management fees out of the equation. You own American business, and you hold it forever. That’s what indexing is.”
According to Ready, there is a place for both. “For us, it’s about giving sponsors lots of choice in their plan,” he said. “We see lots of plans today that have the ability for active investments and a choice of an index product.”
The decision between passive and active should also take into account employee demographics, he added.
Ready said he is concerned that the documentary may scare workers into not participating in a defined contribution (DC) plan. “Unfortunately I just think it was a narrow view of the world as it relates to 401(k),” he said.
He said he is also concerned about the sensationalism of the fees that were quoted in the show. “I worry about the way [fees] were portrayed and somewhat on the outer bounds of some of the extremes," he concluded.
The full documentary is on the PBS website.