Are Retirement Accounts Flawed?

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The FRONTLINE documentary “The Retirement Gamble” by Martin Smith documents the issues with retirement accounts. Overall, the documentary was ok, though anyone who's familiar with 401(k)s will still learn much. The documentary was also very one sided, but this, of course is to be expected from a PBS documentary. The documentary interviewed very left-of-center political individuals such as: Helaine Olen, Teresa Ghilarducci, and DEMOS economist Robert Hiltonsmith. At least the documentary didn't discuss what these three are really known for: a government-sponsored retirement plan.

You can watch the entire program on PBS.

The documentary brings you back to what they considered the golden age of working. You'd get a gold watch and a pension when you retired. Unfortunately, like how most remember the past, it wasn't as good as it used to be. The documentary discusses how pensions were perfect, and there was nothing wrong with them. Except for the fact the documentary fails to mention today the remaining private and public pensions are way underfunded. Today pensions plans like California's CalPERS are delusional, and still expecting 8% annual return in this low FED funds rate environment.

Don't forget at the time the US was a global powerhouse with little competition from abroad. With the improvements in medical technology, the longevity of people has also dramatically increased since that period as well. Meaning the amount needed to fully fund a pension was much less than it is now.

The truth of the matter is that there is no free lunch – risk is risk. The risk and responsibility was simply transferred from the employer to the employee. Unlike the title of the program, all investing to a degree is a “gamble”. There's no such thing as a risk free investment.

The documentary shows retirement planning failures, including mistakes by the narrator. However, it's hard to feel sorry for these individuals. One individual was interviewed in front of a new Macbook Pro with stainless steel appliances in the background. The documentary oddly enough didn't talk to anyone who is successful. That's typical of any documentary because it goes against the narrative.

The interesting part is the intro with economist Robert Hiltonsmith from DEMOS (a very left of center think tank). Robert has only $8,000 in his retirement account. Now granted he's only 31 years old, but it plays into the patsy card. Keep in mind he was educated to be an economist. What was his excuse compared to the other individuals? Robert certainly should know better than saving only 3% of his salary. That “hope”, as he called it, isn't a savings strategy. Ironically from my experience many economists make out to be poor investors.

Unfortunately, with most of these types of programs you never hear from the opposing viewpoint. If you do, you get dumbfounded interviews like the JP Morgan and Prudential guests. Though the deer-in-the-headlights moments were justified. High-fee and actively managed plans are a terrible way to invest for retirement. Many retirement plans overcharge for investment services and can eat as much as 30% of your returns over time. It's critical for you to know how much your 401(k) is costing you.

The most important lessons learned from the documentary were:

  1. Fees matter a lot!
  2. Your investments should be index based funds

If your employer doesn't offer good fund choices, you should lobby for better options. Though in the case of the host Martin Smith questioning the funds in his 401(k) plan seems suspect. As the owner of the business, Martin certainly should have had known better because he picked the plan administrator! If not, shame on him for not researching. Hopefully he's improved the fund options available to his employees.

For the many others with no retirement plan option available, try lobbying for one. Worst case: find a better job that does offer a retirement plan, use an IRA account, and there is always taxable savings. Just because your company doesn't offer a retirement plan doesn't excuse you from saving for retirement.

What's the Real Issue?

Retirement accounts are certainly flawed, but not in the way discussed in the documentary. At least with recent changes in transparency, you will know how much your 401(k) is costing you. I consider this new law a “good thing”, and it certainly was needed. However, you can't legislate stupidity away. How many check their quarterly statement? How many bother to educate themselves and plan early for retirement? Unfortunately, far too many. As Fidelity recently mentioned, the average retirement account is only $397,400 for someone near retirement age. This is certainly concerning and not nearly enough for retirement. Many Baby Boomers are relying on Social Security to significantly supplement their retirement income.

The real issue is some can't, and many don't, save enough for retirement. While fees and actively managed funds do hurt returns – it doesn't matter if you don't have enough money to retire. Poor human behavior is the real problem. The question then becomes should we: let individuals make their own decisions, “nudge” them and setup default settings for retirement, or via government force require savings? Unfortunately, if the last option is used it's typically an all or nothing proposition. Otherwise known by the force of a gun. For someone like me who's responsible, I certainly would love to opt-out of Social Security. Though I can understand to a degree why it exists for others. The problem is I have no choice in the matter and get punished for others' poor investment decisions.

Ironically, I think the annual retirement limits are too low. Though with recent discussions by our government it appears they want to cap the tax deferral and dissuade savers from saving “too much”. My concern as of late is our government will go against the existing retirement laws and somehow tax prudent savers who did plan for retirement. All in the name to equalize outcomes for those who weren't prudent.

Larry Ludwig

Larry Ludwig was the founder and editor in chief of Investor Junkie. He graduated from Clemson University with a bachelor of science in computers and a minor in business. Back in the ’90s, I helped create some of the first financial websites for firms like Chase, T. Rowe Price, and ING Bank, and later went on to work for Nomura Securities. He’s had a passion for investing since he was 20 years old and has owned multiple businesses for over 20 years. He currently resides in Long Island, New York, with his wife and three children.

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  1. Pensions were a fine idea and still would be except the “Foxes were guarding the Hen House”. The sly and self-serving corporate leadership (I should say “Corporate priviledged”) reclassified pensions as “liabilities” a couple of decades ago. And, of course, all corporations want to reduce their “liabilities”. That was the beginning of the end of another great idea for the every man. Pensions were pinched into oblivion. But that wasn’t the only way the foxes worked out then end of a solid institution.

    GOOD TIMES….go bad
    Remember the 90’s U.S. economic juggernaut? I remembering thinking the good times would never end. Many dynamics are caused when you have a sustained economic rally. Everyone’s ROI on investments were in otherworldly territory. It is heady stuff that can contribute to really lousy decisions.
    For example , when pensions became 110% funded (1990’s), corporations and governments chose to determine that 70% funding would be okay and started using these “unsued” source of funds for short-term purposes. Given the two economic downturns in the next decade (2000, 2007) every penny of the 110% funds was needed to keep the Pensions viable. But, it was too late and Pension obligations really did become a liablity. PR spin about the” evil Pensions” is really just another part of the crime committed against the middle class America. No one was there to ask those tough questions about where was 40 years of the people’s money they entrusted to pensions.


    In 2012, Romney said Corporations are people, too. If corporations are people, too, they would treat the people with some basic decency. But, there are just too policies and practices that make your jaw drop.

    Think about it, if one invests 8-12% of your salary into US investment for 40 years that averages 7-9% per year,. It would be a nice next egg that beat SS’s paltry current payout (that by no means sustains the middle class retired standard of living). But, those in power chose greed and short term thinking.

    Wish I made all this up but read for yourself the investigation of this award winning Journalist turned Author:

    It brings out a different set of financial shenanigans than “The Big Short”, but no less compelling.

    Someone smarter than me will have to figure out this thought. Pensions were power for the “every man”. Reduce pensions, and reduce the source of power of the “every man”. No wonder Trump and Bernie were so popular this election cycle. People are feeling the effects of all I have mentioned above. Those next eggs also help the next generation get on their feet. Their is less safety net available than ever for all the last, as well as, the next generations.

  2. Nice review of this documentary. I had a very similar reaction to the content. And your comments about the industry and how people behave is spot on. While the documentary is essentially an ad for how I run my business with my employer clients, and I post a link to the documentary on my site, the information could have been presented with far more fairness. And for what it is worth, I have been an advisor to lower and middle class investors, through employer based retirement plans, for 20 years now and my experience is that people are not nearly as bad off when it comes to preparations for their future as industry commentators and policy types imply. My suspicion is that they have spent hardly any meaningful time with real people that are in the process of thinking of their future while balancing that with the current day to day needs of their life.

  3. I think that the government will keep doing what it always does – attempt to steer the national economy in the direction they think would benefit the masses. Sometimes the choice of direction does indeed hurt those who better manage their money. But I have always believed that one of the key qualities is being able to adapt to changing economic or political conditions and still prevail.
    This may sound arrogant, but the people who watch their pension accounts decline (or barely increase), while still relying only on them for retirement are digging a hole for themselves.

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