Transcripts For WETA Frontline 20131030

Smith make it simple. Thats a question that can only be answered on what your Risk Appetite is. Smith but this isnt making it simple. Well, i. I wish it was simple. If you want to gamble with your retirement money, be my guest. Narrator tonight frontline, the retirement gamble. Frontline is made possible by contributions to your pbs station from viewers like you. And by the corporation for public broadcasting. Major support for frontline is provided by the john d. And catherine t. Macarthur foundation, committed to building a more just, verdant and peaceful world. More information is available at macfound. Org. Additional funding is provided by the park foundation, dedicated to heightening Public Awareness of critical issues. The wyncote foundation. And by the frontline journalism fund, supporting investigative reporting and enterprise journalism. In this bad economy are borrowing from their 401 k s. The number of workers borrowing from their accounts has reached a tenyear high. A Record Number of workers now raiding their 401 k s. Martin smith lets begin with one simple fact america is facing a retirement crisis, and the statistics are grim. Half of all americans say they cant afford to save for retirement. One third have next to no Retirement Savings at all. I just dont know if ill be able to save that much. God willing, Social Security will still be there. For someone like me, itll probably be enough to keep me out of poverty. The Retirement Fund gets sliced and diced and divvied up for wall street to play with. Im just going to have to somehow find a way to save 10 of my salary or 15 of my salary, which is probably what i need to actually be saving to have any shot of retiring, you know, not on food stamps. Yeah, i dont know. Hope to be able to retire. Recently ive started to look into how to make more money, how to increase my income while still teaching. Its tough to really worry about retirement right now because i know its so far off, and i know that worrying and stressing over it is an easy thing to do. But im also of the mindset that as long as i dont have too many bills or anything, too many debts, then i could essentially live off of whatever i get. I guess plan b would be to keep working, but im really banking on plan a. Otherwise, yeah, no, i dont have a plan b. Its hard to imagine even at this point in my life being retired. I just dont see it. You know, living the American Dream of having your house and being able to retire. Nobody has a pension anymore. It wasnt like it was in the 60s or 70s where people worked for, you know, Good Companies and had a pension plan. I think thats a harsh reality for a lot of people. I do think that well be working until. sighs well definitely be working until our probably mid70s, if i had to make a. Unless we can make up some big ground soon. engine revving you know, i consider myself middle class. I dont have the luxury of a couple Million Dollars in savings. The cost of living is going up. Your water bill goes up, your utility bill goes up, your gas bill goes up, your food goes up. Retirees are getting stressed because their nest eggs, their savings are not producing any income for them, so theyre all wondering where theyre going to make ends meet. Im fortunate i can live at a higher standard, because i have a little bit of a nest egg in my Retirement Savings. But others, theyre at poverty level. Smith as for me, im almost 65. I started saving for my retirement in my late 20s. But along the way, i dipped into my nest egg not once, but several times. So this is my ira and 401 k and. Which will be cleaned out over a certain amount of time. Smith and now, like millions of other baby boomers, i too dont have enough. The key to your retirement working out is having enough return on your assets. Smith most of my savings went to pay for my kids educations. Well, this is where fees would really hurt you badly as well. This is where fees would hurt you badly. Smith a divorce and the crash of 2008 didnt help either. It looks like my own personal fiscal cliff. Im now planning to work for as long as i possibly can. This whole plan is predicated on working fulltime until 70. Yes. Smith and at 70 . From age 70 to 75, i have you working parttime. Smith these days, many baby boomers are planning to delay their retirement. Some may never stop working. Its hard. Without knowing exactly how long youre going to live, its difficult to guess how much you need to put away. Most people seem to feel that at retirement, to be okay, you need ten or 12 times pay. And maybe 15. So if you make 100,000 a year, you need one and a half million to be okay. You need to save more, you need to start sooner. You cant start work when youre 20 or 22 and decide to get serious about this in your 40s. The boat has sailed. Smith so what can we do . Time has come today. Smith today, americans entrust over 10 trillion to thousands of big and small Financial Service providers. I just bought stock. You just saw me buy stock. No big deal smith with expensive marketing, these Companies Compete for our money. Yes, im for picking, im for buying. Super, super strong buy. Smith but there are so many choices, its hard to understand. When it comes to mutual funds, its often hard to tell what youre looking at. Smith rather than a system, its more like a freeforall. I dont really see it as a real system. I see it as maybe a retirement mess, is a better word for it. Looking for reallife answers to your retirement questions . If youre lucky, you have a 401 k . Roughly half of Companies Offer a 401 k . If you work for a small business, chances are you dont have access to such a thing. Some companies then offer other supplements, and then of course theres things you can do on you own, like the individual retirement account. Smith so its entirely confusing. Right. Smith so where does one begin . Lets talk about that 401 k you picked up back in the 80s. Smith about 60 million americans have signed up for their company 401 k plan. These are your 401 k election forms. As you can see, there are numerous options to choose from. And remember, this is your retirement, so make your selections carefully. Smith but most people remember their first 401 k meeting as dumbfounding. Any questions . I had no idea. I was so confused. I came out of that meeting and i was like, oh, my god. It was overwhelming for me, the knowledge that you had to have in order to invest. I really was kind of clueless. I didnt know what i wanted to invest in. I really didnt know anything about it. I had learned somewhere something about, if youre young, you should be more willing to take risk. You have time. So other than that, i really knew nothing. And thats one of the best aspects of this. They showed you the plan. You either had your choices between an aggressive investment, moderate, or conservative. You know, there was nobody there managing my money; it was all up to me. So traditional pensions dont necessarily let you take it all in a lump sum. The 401 k is one of the only products that americans buy that they dont know the price of it. Its also one of the products that americans buy that they dont even know its quality. Its one of the products that americans buy that they dont know its danger. And its because the industry, the Mutual Fund Industry, had been able to protect themselves against regulation that would expose the danger and price of their products. Smith it used to be much easier. In 1970, 42 of employees had a pension a guarantee by your employer that you would get a good percentage of your salary and benefits upon retirement. This is the life. What with my Retirement Plan and a few dollars i had saved, i didnt have a thing to worry about. Smith workers didnt have to figure out how to manage their own savings plan. It was done for them. It was very simple. The employee really didnt know any of the mechanics behind it. They just knew when they came close to retirement that they were promised a benefit, a secure income over their entire life. So they had this income until they died. Smith and so what was wrong with that system . Absolutely nothing, to be honest. It was a great system. The problem was that over the last decade, the rules of the game changed. Smith what changed was that people started living longer. New accounting rules, global competition and market volatility too affected the cost of maintaining a pension plan. The old system became an expensive system, i think, from an employer standpoint. They have to know how to manage investment risk and they have to know how to manage longevity risk. Smith and they have to spend a good deal of money. And they have to spend a good deal of money. And if the market doesnt do what they hope it will do, they can lose some of the cash that theyve actually put in from a funded status standpoint. So its pretty complex. One of our Major Concerns is to protect our accounts against risk. Smith it was then that corporations found a new loophole in the Internal Revenue code. What essentially happens is that the 401 k comes in in the late 70s, early 80s. It starts as a Corporate Tax dodge, basically. Its if youre a high earner, youre going to put some of your money aside. Nobody ever thought that this was going to apply to the rest of us. I mean, there was never any thought of that. Smith so not quite by design, a new retirement system was born. traders yelling big brokerages and banks saw an opportunity to expand their business and helped employers set up and run their new plans. They promoted the arrangement as a win for everyone. From the individual perspective, the 401 k actually opened up the opportunity to save for retirement for many individuals who worked for businesses that didnt have a pension. And it also allowed them to have a portable, vested amount of money that they could take with them, as americans started changing jobs more frequently. Smith its as simple, though, isnt it, as the businesses decided to get out of the business of providing pensions and shift the burden to employees . I would express that more as a sharing of the responsibility for retirement between employers and employees. Smith but while some employers contribute to employees 401 k plans, all of the risks fall on the individual. 401 k plans really place the burden on the individual participant to have an adequate retirement. And the vast majority of ordinary people dont know how to do that. Its a very complex task. We wanted them to be able to figure out how much they needed to save for retirement, how to invest that money, and then once they had a lump sum once they retired, how to withdraw the money so they didnt outlive their assets. So thats three different risks. Picking and choosing the right investments requires very careful handling. Smith enter the Mutual Fund Industry. People in the Mutual Fund Industry realized that there was a huge opportunity here, right . I mean, not only could they sell their mutual funds directly to investors, but they could make the mutual funds the very foundation of the 401 k plans. 1981, nobody knew what a 401 k was. By 1989, its in the lexicon. Its being written about, its being talked about. Throughout the 90s, now all large employers effectively have plans in place, people are participating, and it continues to grow from there. Start saving 300 a month when youre 23 and you could retire a millionaire. Smith the boom happened in lockstep with the roaring bull market of the 80s and 90s. Mutual funds were charging high Management Fees, but nobody seemed to care. The returns were great, so no one thinks about, how much is this costing me . When theyre earning 15 or 20 . Smith Star Mutual Fund managers Like Fidelity magellans peter lynch encouraged all of us to jump in. You shouldnt be intimidated. Everyone can do well in the stock market. You have the skills. You have the intelligence. It doesnt require any education. All you have to have is patience, do a little research, and youve got it. Smith saving for retirement seemed as simple as betting on the market. It was a great time. Employees who participated in these plans and invested in the stock market couldnt wait to open their monthly statements to see how much the value had gone up, you know. So things seemed to be working nicely. Well, i was invested in everything stocks, mutual funds, you name it. We would get monthly reports things were growing, everything was growing. In the 90s, you could not lose money in the market even if you were a dumb investor. I mean, it just kept growing and growing and growing. Internet stocks drove a powerful surge on wall street today. Internet stocks suddenly. The economy was doing great. I mean, you had all kinds of gains in the stock market. That was kind of the dotcom era. Those internet stocks continue their meteoric rise. You really didnt have to Pay Attention to. You know, you got your statements at the end of every quarter and you were making money. It was exciting because just gradually over time, we would have a day where we would make 7,000 or. And as much as 30,000 in a day as it built, and even more. In 1996, we had, like, doubled our money. We had, like, 400,000, almost 500,000. Smith Steve Schullo and Dan Robertson believed they were headed for early retirement the day their portfolio topped 1 million. It was november 11, 1999. Oh, that was a very nice day, that day, wasnt it . What happened november 11 . See, he doesnt. Its when our portfolio went over a million, silly. Oh that was just amazing. It was like, well, yeah, this is how investments work. You invest it and it grows. I mean, thats how i thought about it. It was a manic monday in the financial markets. Stocks plunged. Traders are standing there, watching in amazement and i dont blame them. Smith but in the spring of 2000, the market collapsed. Traders are working the phones today. A lot of their customers are freaked out. We did not know. This was our mistake. We didnt know it was a bubble. We just didnt know. Our portfolio had gone all the way down to where it was in 1996, from 1. 5 million to 500,000. 460,000, i think. All that was gone. Smith at the height of the internet bubble, americans had also stuffed 19 of their retirement money into company stock. Should we invest all of our 401 k in enron stock . Absolutely. Dont you guys agree . crowd laughing smith for savers like debbie skoczynski, who worked for comdisco, a computer leasing company, the fall would be precipitous. I was close to a halfMillion Dollars i had in my 401 k with company stock. You know, it was like, wow, look at all the money we have. Look at what is happening. You know, i can retire probably when im 45. The dotcom failures continue to mount. Smith skoczynski not only lost her savings, she lost her job. Comdisco today filed for chapter 11 bankruptcy protection, including another 200 job cuts. They joined a whos who list of corporate bankruptcies. The day i got laid off, i lost it. I thought, oh, my god, im a single parent. I have no job. I have a house, i have a house payment. What do i do . You know, and. I was scared. Really scared. I didnt have much of a retirement left. I couldnt even borrow against it. And it was just something that i never foresaw ever, you know, losing my job, ever. Never. Smith the worst was yet to come. Concerns about shaky home mortgages are triggering fears of a financial meltdown on wall street. Smith eight years later, savers were hit again. Turmoil in the Mortgage Market is far from over. This is volatility we havent seen, of course, since way before you and i were born. Smith when the housing bubble turned into the crash of 2008, it put retirement even further out of reach. The economic turmoil of recent years is putting a comfortable retirement at risk for many americans. It was like, holy smokes, how do you stop the bleeding . The reality of what youve lost is huge. I mean, not only have you now lost half of your 401 k , but your house is not worth anything anymore, either. So anything that you thought you were going to have there is gone, and now half of your 401 k is gone. Its daunting. You know, if it took 13 years to accumulate 80,000 and one year to lose half of that and then try to get that back in another 13 years and only be at the 80,000 that you were 13 years ago . Math doesnt work. The math doesnt work. Smith debbie skoczynski was already in a hole with next to nothing to cushion the blow of a second shock, and now her house was worth less than the loan she owed the bank. You know, theres some days where its like you just want to go scream, you know, in the backyard, just scream, because you have your choice do you pay this or do you pay this . Smith her bills were piling up. She did what a quarter of americans have done she dipped into what was left of her 401 k . I freaked out when i took the money out of my 401 k . It was hard. I mean, you know, you never. Every day on the news, id listen to it and id be like, oh, god, its really bad. Will i be able to keep my house . You know, what if my car breaks down . I cant afford a car payment. It just cant be this hard to make money. It cant. You hear these Big Companies with these people taking these huge bonuses. Youre thinking, well, what happened to the average joe . They just dont care. They made their money already. Growing outrage over those bonuses on wall street. Smith the year the markets crashed, wall street doled out 18 billion in bonuses. The latest bonus bombshell is sending shock waves across washington. Smith Robert Hiltonsmith entered the workforce in 2003. He taught for a bit, worked at a coffee shop and then went to grad school, where he ran up 40,000 in student loans. But on the bright side, he had no savings to lose during the 2008 crash. When he graduated with a masters in economics, he was hired at a small think tank in new york. They had a 401 k , and he began to make regular contributions. But even in a relatively good market, he began to sense that Something Else was wrong. I have a 401 k . I save in it. It hasnt seemed to go up. Its awful. I kept checking the statement and id be like, why does this thing never go up . This is weird. I mean, the stock market i knew was up and down but i was, like, i still should be seeing some returns. Smith hiltonsmith decided to make a Research Project out of the subject. He began by looking at the Investment Options inside his 401 k plan, 22 funds in all. You know, youve got all these names, and the names tell you nothing. Its a balance fund. Its a growth fund. Okay, you know, yes, thats lingo for certain kind of broad investment strategies, but really, what the heck does it invest in . So i went through each of the actual fund prospectuses, which took me an exorbitant amount of time because each of these things were, you know, 50 pages long. They still wouldnt tell you what they were doing. Smith as he dug deeper, he discovered one fund invested in mortgagebacked securities, the kind of security that caused the collapse of the housing market. But thats not what worried him. I was digging into all the different aspects of it, and i kept coming back to fees. So heres the first mention of fees. This exp ratio right here. Why would you think that exp ratio means fees . Smith hiltonsmith found over a dozen different kinds of fees, including Asset Management fees, trading fees, marketing fees, recordkeeping fees and administrative fees. Fees when you withdraw money. Fees when you take loans. Fees when you actually get money out when youre retired, which i actually didnt even know about. I spent a month literally going, oh, actually this fee is a subtype of this fee, and, oh, that covers that, or no, thats another name for that. It was very opaque. Smith the average actively managed mutual fund carries an annual expense of 1. 3 . Some funds charge a fee of 2 and even as high as 5 . That may not seem very much, right . You know, youve got 50,000 or 100,000, and okay, so you lose 500 or you lose 1,000 a year. Thats what you would pay to a Financial Advisor, right . But if you add that up over 20 or 30 or 40 or 50 years in a 401 k plan, all of a sudden, youre well into the six figures as your balance grows. And thats the difference between running out of money before you die or having a little money left to pass on to your heirs. A lot of 401 k programs are lousy. The fund choices stink, the fees are outlandishly high, and in many cases, you can take two nextdoor neighbors, you know, living on maple street in any town, usa, and one person is paying ten times as much to invest in a 401 k as the other person. Smith to understand this fee business, i went to talk to someone who has thought long and hard about it jack bogle, the founder of vanguard, a company that offers some of the lowest fee products on the market. He says that if you want to improve your retirement outcome, make sure to minimize wall streets take. Costs are a crucial part of the equation. It doesnt take a genius to know that the bigger the profit of the management company, the smaller the profit that investors get. The Money Managers always want more, and thats natural enough in most businesses, but its not right for this business. Smith bogle gave me an example. Assume youre invested in a fund that is earning a gross annual return of 7 . They charge you a 2 annual fee. Over 50 years, the difference between your net of 5 the red line and what you would have made without fees the green line is staggering. Bogle says youve lost almost twothirds of what you would have had. What happens in the Fund Business is the magic of compound returns is overwhelmed by the tyranny of compounding cost. Its a mathematical fact. Theres no getting around it. The fact that we dont look at it, too bad for us. Smith what i have a hard time understanding is that 2 fee that i might pay to an actively managed mutual fund is going to really have a great impact on my future Retirement Savings. Well, you have to rely on somebody to get out a compound interest table and look at the impact over an investment lifetime. Do you really want to invest in a system where you put up 100 of the capital, you the mutual fund shareholder, you take 100 of the risk and you get 30 of the return . Smith i wanted to know how others would react to bogles claims. Jp morgan chase offers more than 100 mutual funds that charge anywhere from less than 0. 5 to more than 2. 5 annually. I want to get your reaction to an example that jack bogle gave us, and that is that if you invest over a 50year investing lifetime in a mutual fund making 7 a year on average, but youre paying 2 in fee for that, that that 2 will erode Something Like. Twothirds of your gains. So the lower fees relative to any given investment will always result in a higher accumulation. Smith but is his example correct . I mean, its shocking that you would be giving up twothirds of your. So i dont know the math behind the example that youre citing. Smith but does it sound correct to you . It sounds. It sounds high. Smith it had sounded high to me as well. So i took bogles advice, found a compounding calculator online, and used a simple example in order to isolate the effect of fees. Take an account with a 100,000 balance and reduce it by 2 a year. At the end of 50 years, that 2 annual charge would subtract 63,000 from your account, a loss of 63 , leaving you with just a little over 36,000. Most investors are unaware of all the types of fees theyre paying. So as soon as everybody is actually seated, well go over whats going on. Smith crystal mendez started saving for retirement in her early 20s, but she rarely looked at her account and just assumed it was doing well. One day, my fiance was looking at his retirement, and he was essentially bragging about how great he was doing, so i pulled out my annual report and we kind of compared notes, and i realized that he was doing far better than i was. He basically said, honey, i think youre getting ripped off. We should look into this. Smith after looking at the fine print, mendez found out that she was invested in an annuity product with a low return and a high surrender fee a penalty for any early withdrawals. I think it was 10 , was the surrender fee. So i was like, you know, battling with myself. Do i really want to give these people my money or leave it there, and then i wont have a surrender fee . But i think in the end, i just said, forget it, they can have the fee and ill move on with the remainder of my money. Smith all this talk of fees made me curious about my own 401 k . I run a Small Company with a handful of employees. We make documentaries for frontline. But were too busy to look at the fine print of our Retirement Plan. But while putting together this report, i went online to look at what my plan was offering. The funds that im allocated to, if you look at. Smith i found what hiltonsmith found confusing tables of all sorts of products with different kinds of fees. But it doesnt have any sort of ticker on it. Smith but those are proprietary mutual funds. Right, they have 434. Smith i even found this offering the American Century livestrong fund, a mutual fund cobranded with Lance Armstrongs cancer foundation. How did this get here . How do funds like these get into my plan in the first place . In seeking an answer, i came across another family of fees. It works like this in order to get their offerings placed on employer 401 k menus, mutual funds rely on brokers and plan administrators. In return, the brokers ask for a payment or revenue share. Its a kind of paytoplay arrangement, or, as some say, a kickback that adds another layer of costs to Retirement Plans. A lot of people use a term like kickback because in some ways, it is. Its a legal kickback. Theres nothing against the law about it. But it is a sort of you scratch my back, ill scratch yours kind of arrangement. If you sell our funds, you will get a portion of the revenue we earn from selling them through you. This is a kind of subrosa part of this industry, and theres not a lot of information about it. But the fact of the matter is, as far as i know, those kind of payments to brokers for distributing your shares has simply become part of the system. You know, the brokers are getting a little religion here. Theyre saying, why should i distribute your funds unless you pay me to . You get these big Management Fees. I want some of it. Youre getting plenty. Give me some. Smith the problem is that these fees are not paid by the fund company. The bill is passed to you and me. Here it is, buried deep in my 401 k plan documents. It took me about an hour to find the reference. Do you think the industry could do a better job of making people aware of the effective fees on their savings . I think we could make people aware of the effect of every pressure that they have on their accounts. Smith what stands in the way of doing that better job . laughing what i would tell you is, sometimes its very difficult to get people to focus on something that seems complicated and dull and boring. So could we do a better job with helping consumers understand all the things that are tied to what they just bought, whether its Financial Services or their riding lawn mower . Yes, its too complicated. Ah, retirement. Sit back, relax, pull out the paper and. What . An article that says a typical family pays 155,000 in wall street fees on their 401 k s . Seriously . It turns out the average American Household will pay nearly 155,000 over the course of a lifetime in fees alone. Thats according to a new study. Here to break it all down, Robert Hiltonsmith. Smith in the spring of 2012, Robert Hiltonsmith came out with his study on the impact of fees on Retirement Savings. When we looked at it, we really found that all of the costs of retirement are really being shifted onto individuals. I was amazed. I mean, everybody covered it all the major outlets and all of the financial industry outlets as well. Every one of them. These really have been sold to us, these 401 k s and iras, as Safe Products over the years. The point is that this system isnt built for individuals at all. Its certainly not built for their benefit. An eyeopening report out this morning fees are taking a huge chunk out of our retirement. Smith the industry took issue with some of hiltonsmiths numbers, but he had made his point. We are being charged a lot by these Financial Firms to do not a lot, in a lot of cases. We need Something Different out there. We need something simpler, something safer. You know, honestly, something that people can put their money in, get good returns, not have to worry about losing their entire nest egg, and then trust that theyll actually be able to retire one day if they do the right thing and save enough, etcetera. We have a very Prestigious Panel with us today. Smith there is someone who has been promoting something simpler. I was criticized many years ago. Somebody said, the only thing that poor guy has going for him is the uncanny ability to recognize the obvious. laughing smith for the past four decades, jack bogle has been preaching the gospel of longterm, lowcost investing through index funds. Get wall street out of the equation. Get trading out of the equation. Get Management Fees out of the equation. You own American Business and you hold it forever thats what indexing is. Own a fund that owns the entire u. S. Stock market, does no trading, and has a cost of one percent a year to own. And that is the only way to do it. Then you are the creature of the market and not of the casino. Smith index funds buy and hold a broadly diversified basket of stocks that match the holdings of a market index the s p 500, the wilshire 5000, or maybe a bond or commodity index. They dont eliminate market risk, they ride the market up and down, but they are much cheaper because there is no active manager. You can guarantee to the shareholder that they will capture their fair share of the stock markets return, for better or for worse. If you want to gamble with your retirement money, all i can say is be my guest. But be aware of the mathematical reality. Maybe you have a one percent chance of beating the market over time. It has been proven right year after year after year because it cant be proven wrong. Its a mathematical certainty, a tautology, if you will. Smith jack bogle would say, stop fooling yourself. Youre better off investing in a broadly diversified index fund than in actively managed mutual funds. What do you say to that . I think hes a. Im not going to secondguess him. Im going to say that i think that theres a role for actively managed product in the marketplace. Smith but that is secondguessing him. Okay, so im secondguessing jack bogle. I respectfully disagree. I think theres a role for active management in portfolios. Thats my belief. Smith but what is that role . How well do they perform . They come with names intended to reassure every Investor Growth funds, value funds, balanced funds and they are run by seasoned professionals who are paid handsomely to manage them. The question is what are you getting for that . Are you getting superior performance . And the answer unequivocally for the industry as a whole is no. Theres no Scientific Evidence that mutual funds outperform a simple strategy of holding the market index. The verdict is in. Its been in for at least a quarter century. All else being equal, you should buy the cheaper fund. And one of the ultimate dirty secrets of the Fund Industry is that a lot of people who run other Fund Companies own index funds in their own accounts and dont talk about it. Unless you put a couple beers in them. Smith the evidence is overwhelming. Year after year, actively managed mutual funds fail to beat index funds. Studies have borne this out repeatedly over various time periods, in bull and bear markets. I asked the head of retirement at prudential, which markets dozens of activelymanaged funds, what she thought about this. Yeah, i havent seen any research that substantiates that. I mean, i dont know whether its true or not. I honestly have not seen any research that substantiates that. Smith so all the research thats done at vanguard that makes that argument, youve looked at that . No, i havent. I havent read everything. But so much of it depends on, you know, what i need is different than what you need, and there is not an Asset Allocation or a Fund Strategy thats right for everybody. Smith i talked to one woman at prudential whos head of retirement and asked her if she was aware of the studies that show that index funds did better over time than the activelymanaged funds, and she said she wasnt. Thats unbelievable. I find that actually unbelievable. Smith these people that are in the business know that the index funds do better, right . They convince themselves thats not true. When ive talked to these people. Smith but wait a minute, all the studies. How can they convince themselves thats not true . Because theyre convinced theyre recommending the fund thats going to do better. This is not a time when you want to be buying index funds. Smith and of course, there are hot funds. This is not gambling; its investing. Smith the Financial Media loves them. The bestperforming u. S. Stock mutual fund this year. Smith and were often susceptible to the lure. The problem is, as the small print says, past performance doesnt guarantee future results. Well, if only the past were prologue, it would be a great thing. Returns do not persist. Some funds that are outperforming the broader market. Good markets turn to bad markets, bad markets turn to good markets. So the system is almost rigged against human psychology that says if something has done well in the past, it will do well in the future. That is not true; it is categorically false. The high likelihood is when you get to somebody at his peak, hes about to go down to the valley. The last shall be first and the first shall be last. Last years dogs could actually be this years winners. Smith so why arent more of us invested in a diversified portfolio of lowcost index funds . Critics say its because the Fund Industry spends millions hoping workers will follow their Financial Advice. Theyre hoping that the worried worker will actually trust an advisor. You have the audacity to believe your Financial Advisor should focus on your longterm goals, not their shortterm agenda. Smith in its marketing, the industry implies that Retirement Advisors are on our side. Smith but when it comes to employee Retirement Plans, there are no clear standards on who can give advice. Our Financial Advisors lead from a new position of strength. Smith the department of labor is responsible for regulating employee Retirement Plans. We have a system today where anybody can hold themselves out as an expert. They call themselves Retirement Planners, financial planners, advisors, et cetera. We dont have a standard way that the consumer can figure out who has the expertise to provide advice. Smith whats a Financial Advisor . That is a term that means almost nothing. It is somebody who might be a financial planner, or it could be a broker who is really a salesperson. There are registered investment advisors, or fiduciaries, who are obligated by law to act in their clients best interests. Lets talk about the cookie cutter retirement advice you get at some places. Smith but the vast majority of socalled advisors, around 85 , are not fiduciaries. Selling their funds makes them more money. Which makes you wonder, isnt that a conflict . Smith they are brokers or salesmen. A fiduciary is a professional who, by law, is supposed to put your interests ahead of their own. Brokerdealers are not under that obligation. They have to conform to a suitability standard, which means they cant put you into something which is totally unsuitable for you. It doesnt have to be the best thing that you could pick out for them. Its just something thats suitable. Its okay. I cant believe that somebody would want to get into a business and then stay in the business of merely being suitable. Basically your guy is out for himself to maximize his sales, and the way he does it is to be loyal to the mutual fund. And they try to sell you the most profitable products. School Bell Rings smith Steve Schullo learned this lesson the hard way, when he encountered someone selling Financial Advice in his school lunchroom. I met my salesperson in the teachers cafeteria. She showed us the different products. You know, i didnt know very much about investing, but in the back of my mind, way back then, how is this person compensated . Was always a question, because i had worked in the private sector before i came into teaching, and i knew there were no free lunches. Nothing is free. Smith the salesperson working on a Commission Basis offered schullo an annuity a retirement insurance product with what he thought was a guaranteed return of 12 a year. So i signed up for 200 a month. And for about five years, the Interest Rate was going way down to 3 . And i was wondering, what the heck is going on here . Why is it down to 3 . I didnt understand that the Insurance Company has the right, every year, to reset that rate as they see fit. Smith so how can you know when a Financial Advisor is really a salesman . If youre working with somebody who is trying to sell you Financial Advice, you say to them, are you acting in my best interest here . Would you be willing to sign a pledge that says that youre going to act as my fiduciary at all times with all products . Because if youre not, then im going to leave. And its really just as simple as that. Smith another broker sold an annuity to the featherstons after the crash of 2008. At the time, it seemed suitable. This was a product that we had discussed with him, and we thought that this would insulate some of our money from what we had just gone through, what a lot of people had just gone through. You know, we trusted him. Yeah, we trust him. Yeah, we trust him. Smith but the problems came after mark got laid off and the couple had to break into their account. I mean, were talking on 7,000, the fees have been upwards of 600 just to get the money out. I can agree paying the 10 penalty, you know, to uncle sam, but these Companies Need to realize that theyre making money off the backs of people that have worked hard for their money. It makes you mad, but you know, what are you going to do . Youre powerless. He paid for advice that was not appropriate. Smith to try and hold the industry accountable, the department of labor proposed a new fiduciary rule in the fall of 2010. When Retirement Savings are at stake, advisors should put their clients interests first. The critical question is, what constitutes paid Investment Advice . The proposal were discussing today will amend a 35yearold regulatory interpretation. Smith the rule would require all Financial Advisors to put their customers interests before their own whenever dealing with retirement accounts. Today, there are trillions of dollars in each of these markets. The variety and complexity of Financial Products have increased and made fee arrangements far less transparent. Smith the Financial Services industry lobbied hard against the new rule. It just seems that the Financial Services industry is really concerned about. Smith they got the attention of congress. Our job here in congress is not to preserve the Business Model that has existed for 35 years, but if you are going to upset that Business Model, we had better know why and we had better know where we are going. We dont need an alternative. We just dont need to do this. Smith the Labor Department pulled back their proposal. People in the suitability business have very good lobbyists, and theyve done a very effective job of creating doubt in washington and concern about how Something Like this would be administered, about how the fiduciary standard would be enforced, about the costs of making whatever transition you would need to make. The full political power of the Financial Institutions and the Mutual Fund Industry was completely engaged in making sure that that rule never saw the light of day. Smith they were saying the rule is too tough. They were saying they dont want any rule. Smith they dont want to have fiduciary applied to them. Because theyre not really dispensing Financial Advice. Theyre just dispensing information and educational services, yada yada yada. Give me a break. Theyre steering you to the funds controlled by their company. Otherwise, you might leave and go somewhere else. Smith i asked the head of retirement at jp morgan Asset Management why anyone would want to take advice from someone not bound by a fiduciary pledge. Shouldnt i want to only work with somebody who has a fiduciary obligation . Not necessarily. Smith no . No. Smith isnt it better . Its different. Smith its not better . It can cost more. You may not get any different advice or outcome, and it can cost you more. Smith right, but make this simple for the investor. I sit down with somebody, and they give me some advice. You say i should ask a lot of questions. I want to know whether or not one of those questions shouldnt be whether they have a fiduciary responsibility to me. Yes, i think thats a very good question to ask. Smith and if they dont . Ask them what that means and see what you think about their answer. Smith well, make it simple. Should i prefer somebody with a fiduciary responsibility . So thats a question that can only be answered on a personal basis based on what your level of need is, what your Risk Appetite is, and how much of the Investment Decision you want to delegate. Smith but this isnt making it simple. Well, unf. I wish it was simple. Smith over the past couple of decades, weve handed over more than 10 trillion of our retirement money to the Financial Services industry. Theyve built a pretty Good Business out of it. But how well is it working for you and me . So far, most efforts to reform the industry have fallen flat. Recently, the government has forced through some new rules on fee disclosure, and the department of labor says it will try to reintroduce a new fiduciary rule soon. Unless theres a gamechanger, unless theres a law passed or laws passed or scrap the system and start over, as i advocate oftentimes, no, nothing will change, because theres no incentive for the market to change. People will just keep on saving because its the only option theyve got, and companies will keep on raking in the profits. Smith so saving for retirement remains a bewildering and frightening challenge for millions of americans. For the people we met in making this program, the outcomes are mixed. Some are confident. I definitely couldnt retire right now, but the fact that im planning ahead and investing wisely is hopefully, you know, going to help, and i dont think ill run out of money. I am concerned about running out of money, but im a survivor, and if i have to downsize into a tent, i will. The retirement dream, i mean, were living it right now. This is it. This is it. You know, life gives you these opportunities. We never planned to learn about investments until we got slammed in the gut. Then, oh, we better start paying attention here. Smith others are worried. Im leery. Im really, really leery. I dont know what im going to do. I feel like ill be working for the rest of my life, absolutely for the rest of my life. Its hard to imagine even at this point in my life being retired. I just dont see it. I just dont see it either. My Retirement Plan is fingers crossed and pray, basically. Yeah, win the lottery. Hope my dad has more money than he does. And the truth is, just going to have to find a way to save way more than you should have to. Smith meanwhile, what about hiltonsmiths research . He is now finishing his ph. D. Dissertation on americas retirement crisis, but the grant money he needs to support his continuing work has dried up. As for me . Over the last several months, ive spent a lot of time playing with different online retirement calculators. Some were optimistic, others very discouraging. I will keep working. Next timfrontline. He was a lost soul. He believed violence was the only effective tool. On a political mission. He wanted to bring about a new world order. gunshot . Shots fired at the book depository. President kennedy has been cut down by assassins bullets. Did Lee Harvey Oswald act alone . Or was he part of a vast conspiracy . Im just a patsy. On the 50th anniversary, frontlinedefinitive film, who was Lee Harvey Oswald . Go to pbs. Org frontline for a closer look at what the fees in your 401 k plan are actually costing you. This is where fees would really hurt you badly. Questions to ask about funding a balanced Retirement Plan. Martin smiths extended interviews with jack bogle. Look at the impact over an investment lifetime. And helaine olen. Retirement mess is a better word for it. Connect to thfrontline community, sign up for our newsletter, and follow us on facebook and twitter, or pbs. Org frontline. Frontline is made possible by contributions to your pbs station from viewers like you. And by the corporation for public broadcasting. Major support for frontline is provided by the john d. And catherine t. Macarthur foundation, committed to building a more just, verdant and peaceful world. More information is available at macfound. Org. Additional funding is provided by the park foundation, dedicated to heightening Public Awareness of critical issues. The wyncote foundation. And by the frontline journalism fund, supporting investigative reporting and enterprise journalism. Captioned by Media Access Group at wgbh access. Wgbh. Org for more on this and other frontline programs, visit our website at pbs. Org frontline. Frontlinethe retirement gamble is available on dvd. To order, visit shoppbs. Org, or call 1800playpbs. Frontline is also available for download on itunes. What if news wasnt just a commodity. But a commitment . News anchor the fiscal cliff is a fiscal Suicide Mission why shouldnt we explore every side of the story . News anchor the syrian army had pulled back. Where can you turn for news you can trust . How do we make sense of Something Like this . 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