PBS Frontline’s recent episode on the defined contribution retirement industry pulled no punches. By highlighting a series of real-life people who have suffered significant losses in their retirement savings, Martin Smith, the episode’s producer, put the spotlight on hidden and high fees, conflicts of interest, and stock market risk as being at the core of what he called America’s retirement crisis.
America may indeed be facing a retirement crisis, but we believe Frontlinefocused largely on issues that already have been or are being addressed with recent regulatory efforts, rather than one of the most significant reasons for the lack of retirement readiness; namely, inadequate retirement savings and poor investment decision-making.
Fee transparency, for example, has been improving steadily, and more participants than ever are becoming aware of the fees they pay in their retirement accounts. New Department of Labor disclosure regulations have prompted plan sponsors and providers to develop better ways to present fee information in an understandable manner. And these changes are also helping to eliminate conflicts of interest by making revenue sharing arrangements more transparent to participants. Many plan sponsors have moved to an explicit fee approach, thus eliminating revenue sharing altogether. While PBS focused on how some participants don’t even know they are paying fees, in real life, sponsors and service providers have been working hard to make sure that is not the case. At Arnerich Massena, some of our clients have requested that we present “fee disclosure” workshops to participants, explaining the fees in their plans in person.
With fee disclosure issues, high fees have also come under scrutiny. We have been working with our clients for years to benchmark and analyze fees, to ascertain that both provider fees and investment management fees are reasonable and in line with the services rendered. We also work with our clients to make sure participant accounts are invested in the most appropriate share classes with the lowest possible fees. Fees do matter, and do impact retirement savings, but what Frontline fails to point out is that fees cover services, just like in any other industry. The services participants receive don’t (and shouldn’t) come free, but the fees charged must be reasonable, and participants should be aware of those fees in order to make better, informed decisions.
While the 2008 crisis hit retirement savers hard, the idea that the stock market is risky has never been hidden from retirement plan participants. Instead, the industry has focused, since well before 2008, on helping participants learn how to diversify and manage their investment risk. For instance, ten years ago, it was common to find participants with 50% or more of their portfolio invested in their employer’s company stock. Thanks to efforts to educate retirement savers about the risks of the stock market and the need for diversification, over-investment in company stock is now much rarer, with many employers even limiting the allocation of company stock in retirement accounts. In addition, recognizing how burdensome it is for participants to try to learn how to wisely invest their savings, more plans are providing options like balanced funds, target-date funds, and risk-based funds, which are already diversified and often professionally managed for the participant.
One of the areas with which we took strong exception is the episode’s implication that all participants would be better served with a line-up exclusively of index funds. John Bogle, Vanguard founder, suggests on the show that passively managed funds are better because they are cheaper, and discusses research that shows active funds underperforming the broader market. Index funds certainly have their value and their place in a retirement plan. However, active management can also add value, which has also been demonstrated by research, especially in particular asset classes and in certain types of market environments. There is great variety among actively managed funds, and the right actively managed funds can have a significant impact on the outcome. And, as more participants have access to professionally managed portfolios, like risk-based and target-date funds, more sophisticated instruments can be used appropriately in participant portfolios. We feel that Frontline and Bogle did a disservice by implying that the same solution, index funds, is appropriate for all retirement plans, without any discussion of varying plan objectives, participant populations, and fund lineup structures.
The Profit Sharing Council of America’s (PSCA) response to Frontline is a reminder of the hard work that has gone into improving America’s retirement security: “It is unfortunate that Frontline neglected to discuss the enormous value that committed plan sponsors add to the retirement plan system. These efforts, in partnership with service providers, have resulted in the successful defined contribution retirement system that has already demonstrated that today’s workers are going to enjoy a better retirement than previous generations.” PSCA also extended a free year-long membership to Martin Smith’s small company to help educate him on his own fiduciary duties.
We hope that Frontline’s “exposé” does spark conversation among plan sponsors. While the show’s producers seemed to have a limited understanding of the modern retirement plan industry and the efforts it has made toward helping America save for a secure retirement, they did understand that America is facing a crisis. We are glad to see the episode prompting a larger dialogue around the retirement issues facing the country. To watch Frontline’s “The Retirement Gamble,” click the address: www.pbs.org/wgbh/pages/frontline/retirement-gamble/.