“The Retirement Gamble” FRONTLINE


At the suggestion of a client, I watched this documentary. My post about Price vs Value demonstrates that if active fund management delivers added value that is GREATER than the difference between the managed fund and a non-managed index fund fees then the investor is ahead. After all, if your managed fund is delivering a 20% higher net rate of return than the index fund; 10% vs 8%  for example, do you really care how much they are charging for management? Keep in mind that when you compare rates of return for mutual funds, the figures you read are standardly NET rate of return. That is NET of management fees; AFTER the fees have been deducted.

In my humble opinion, in this story the effect of management fees are grossly exaggerated as a factor in the shortcomings of the 401(k) as a retirement vehicle for working Americans. The discussion about why company pensions went away did not focus on the real culprit: the drive for maximum profit. This factor was carefully couched in the mention of “global competition”. I believe that without a doubt company pensions are the second best way to insure a comfortable and well earned retirement for an American worker. The best way would be Social Security. We know, however, that the grand bargain struck between Roosevelt and the “captains of industry” in the 30’s; that is union recognition and company benefits such as pensions and healthcare has been smashed by the Reagan era and years subsequent. Social Security now claims to be a “supplemental retirement benefit” which should be supplemented by personal savings and investment. Social Security could become the primary and sufficient retirement plan for American workers. It would only take the political will to raise the contribution rate for employees and employers.

Corporations now only need to offer the 401(k)’s to claim they have a “retirement plan”. The old fashioned pension plan was funded (frequently invisibly) by the employee and the company together. The employee was given a statement that showed what their income would be until they died if they worked X number of years for the company. The management of risk fell on the company’s advisor. Some pension managers did better than others and they were expected to have a fiduciary obligation to the company. The employee had no need to learn the intricacies of investing.

Automation through computerization and robotics has caused skyrocketing productivity. This means that it takes fewer employees to produce the same number of products. Therefore, fewer and fewer workers are employed by the company resulting in less money flowing into the pension fund. However, companies howl at their unfunded pension obligations while  banking the excess profits they have reaped through automation.  I believe this is the primary cause of the insolvency of so many pension funds since the mid-1980s.

Jack Bogel, CEO of Vanguard has soap to sell. He sets his mutual funds apart from the pack by claiming the superiority of index funds over managed funds with their “exorbitantly” higher fees. In my previous post I took that claim apart with the first comparison I made. The real culprit of the dismal success of the 401(k) as a retirement plan is its complexity, corresponding lack of access to competent advisors with a fiduciary obligation to the participants, insufficient plan contribution by the employer (the “company match”), and most of all, downward wage pressure that leaves workers with insufficient disposable income to invest in their retirement.