In his excellent Frontline documentary airing Tuesday, April 23, on PBS, The Retirement Gamble (check local listings), Smith, 64, says: “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. And now, like millions of other baby boomers, I, too, don’t have enough. Most of my savings went to pay for my kids’ educations. A divorce and the crash of 2008 didn’t help either. I’m now planning to work for as long as I possibly can.”
After watching The Retirement Gamble, which Smith co-wrote with producer Marcela Gaviria, you’ll understand why millions of Americans are in the same boat.
Outdated View of Retirement
“We have a bulge of boomers and what we’re facing is the old-fashioned idea cemented in our heads that when we’re 65, we ought to be able to retire,” Smith told me. “But the current reality is we can’t afford that and nobody’s got our back. We’re on our own.”
Many of us, including some retirement-jittery people featured in the show, aren’t doing a terrific job of putting aside money for our futures. As Smith says in his program: “Saving for retirement remains a bewildering and frightening challenge for millions of Americans.”
You’ve undoubtedly seen the discouraging numbers: 57 percent of U.S. workers (and 47 percent of those 45 and older) have less than $25,000 in savings and investments, excluding their homes, according to the recent Employee Benefit Research Institute Retirement Confidence Survey. And nearly half (49 percent) aren’t confident about being able to afford a comfortable retirement, the highest level in the survey’s 23-year history.
I believe plenty of Americans could save more, but I also agree with one of the key points in The Retirement Gamble: Many of the 51 million people who have 401(k) plans simply don’t understand how to size them up and make smart investing choices.
Retirement Driving Without Instructions
As Eleanor Blayney, the consumer advocate for the Certified Financial Planner Board of Standards, said at the National Press Foundation retirement issues fellowship program I recently attended, “We are now in the driver’s seat, but a lot of us don’t know how to drive.”
Gaviria told me that as she was working on the program what surprised her "is that you’re basically praying and hoping the money will be OK when you put it into a 401(k)." Gaviria concedes that having a 401(k) is better than not having one. "But you have to be savvy about what you’re investing in, how risky it is, where the market is going and the fees you’re paying,” she said.
It doesn’t help that the typical 401(k) plan offers 19 funds, according to the latest survey by the Plan Sponsor Council of America. Or that employers have done a spectacular job of obfuscating 401(k) fees, making it nearly impossible for employees to compare the costs of the various funds they’re offered. “Fees have tremendous consequences,” Smith said.
On average, 401(k) fees reduce investment returns by 1 to 2 percent a year. The Demos think tank published a report last year estimating that a median-income, two-earner household will pay nearly $155,000 in 401(k) fees over the course of the two workers' lifetimes.
Another concern is that employers have increasingly been automatically enrolling 401(k) participants in target funds which tilt a portfolio away from stocks and toward bonds as investors age. That strategy is fine, but these investments typically have much higher fees than index funds, which buy all the stocks or bonds of a particular index and hold onto them.
“Only one or two choices in your 401(k) will be index funds, if there are any index funds at all,” Smith said.
As Teresa Ghilarducci, an economics professor at the New School for Social Research, puts it in The Retirement Gamble: “The 401(k) is one of the only products that Americans buy that they don’t know the price of it. It’s also one of the products that Americans buy that they don’t even know its quality or know how to judge its quality.”
401(k) Fee Disclosure Didn’t Work
But, you might be saying, didn’t the government last year force companies to send employees disclosure statements laying out their 401(k) fees?
It did, but not very well. Half of employer-sponsored retirement plan participants still don’t know how much they pay in plan annual fees and expenses, according to a new survey by LIMRA, a group of life insurers and financial services companies. Worse: More than 1 in 5 (22 percent) believed they didn’t pay any fees and expenses.
How could that be? Well, some of the fee-disclosure statements are more than 30 pages long and riddled with footnotes, according to USA Today.
Even The Retirement Gamble’s Smith is scratching his head over the fees on his 401(k).
“Yes, there’s a number, an expense ratio to look up" — a summary of the fund’s total cost, derived by dividing its fixed costs by total assets — "but that only gets you halfway there,” Smith told me. “You have to do the math and you need a fair amount of sophistication to do it. I still see fees charged to me with names that don’t really describe what they’re for, so I don’t think the industry wants to make things too clear.”
A 'Looming Catastrophe'
What Smith calls “the retirement gamble,” Fidelity Investments’ president of asset management and corporate services, Ronald P. O’Hanley, dubbed a “looming catastrophe” in the retirements of millions of boomers, according to a U.S. News article quoting from his recent speech to a U.S. Chamber of Commerce-sponsored conference.
And O’Hanley sees consequences extending far beyond the ability of Americans to retire comfortably.
“If tens of millions of Americans reach retirement with insufficient savings,” he said, “the impact on our citizens, our economy and our national security could be catastrophic — and not something we could solve for most retirees after the fact.”
I asked Smith how he thought the retirement system — or what Helaine Olen, author of Pound Foolish, a new book slamming the personal finance field, calls “the retirement mess” — should be changed to improve prospects for the public and the nation.
“Employers should give employees a smaller menu of low-fee choices and some mandatory education,” he said. “For those who don’t take the education, there should be some paternalism and guidance, with auto-enrollment in low-fee index funds.”
“Some were optimistic, others very discouraging,” he says in the Frontline program show. “I will keep working.”