Wall Street has made it far more likely that you will spend at least some of your golden years eating Fancy Feast.
A new Frontline documentary, "The Retirement Gamble," which first aired Tuesday night and is now available online, highlights how Wall Street is stripping our already dwindling retirement funds clean with fees and bad performance. It's something that we just let happen because we usually don't know any better, and the legwork of figuring out our fees and investments is hard, because the industry has made it that way. We often don't realize that we would be far better off simply putting our money into low-cost index funds and forgetting about it.
The documentary spends a lot of time on a 2012 research paper by Robert Hiltonsmith of the think tank Demos, which found that a median-income, two-earner family will pay a staggering $155,000, all told, in 401(k) fees. That cash represents about 30 percent of the total retirement savings this hypothetical family would have had, if it had paid no fees.
"Asking struggling American households to pay these prices to save for retirement is more than patently unfair, it’s immoral," Hilsonsmith wrote in the report.
Once upon a time, American workers were far more likely to work for a company that offered a defined-benefit pension plan, the cost of which was covered by the employer. Today, we are instead encouraged to invest in a 401(k) or similar retirement plan, which offer limited investment choices. Most of those choices are "actively managed" funds that try to beat the stock market, but charge higher fees for the privilege. It is often difficult to see what sort of investments these funds have made and the kinds of fees they are charging.
As the documentary makes sadly clear, the retirement system is now a giant buffet table of our money, from which various people on Wall Street are grabbing as much cash as they can, while we're not really paying attention. They take management fees, promotional fees and administrative fees. They take fees for active trading, which are often hidden from the investor.
And the fees that you can see are often presented in a misleading way, as a percentage of total assets, rather than as a percentage of your returns. This makes a big difference.
For example, if you have $50,000 in a fund that returns about 7 percent annually but charges 1.2 percent in trading fees and another 1.2 percent in other fees, then your net return will be cut to 4.6 percent. That doesn't sound like a lot, but it means about a third of your total return has been eaten up by fees.
Frontline asked several people from the fund industry to defend themselves, but those defenses were flimsy at best. These people claimed that they added value by investing your money skillfully, meaning investors in actively managed funds will end up with more money than people in passive funds like index funds, thus justifying the extra fees.
But that is usually untrue: Active money managers seldom outperform the market. Instead, the vast majority of money managers lag the market. In fact, dart-throwing monkeys and mouse-tossing cats often pick stocks better than active money managers.
A far better alternative than a dart-throwing monkey is a low-cost, passive fund like an index fund, which tracks broad market indexes like the S&P 500. Markets have their ups and downs, yes, but active money managers have proven they have no idea how to avoid them. Ultimately the best approach is to simply ride them out, ignoring the ups and downs.
An even better alternative would be to go back to those old-fashioned defined-benefit plans, which didn't leave workers with all of the risk. It would also help if we weren't constantly trying to weaken Social Security for future retirees, making it even more likely we'll all end up eating cat food.
But enough with the crazy wishful thinking! At the very least we do have the power to make sure Wall Street is not picking our retirement plans clean. We just need to spend a few hours studying the fine print in those plans.