President Obama should be commended for taking on the brokerage industry for ripping off multitudes of 401(k) participants. Last month he announced support for a Labor Department proposed regulation that would subject those advising 401(k) participants to a fiduciary standard that makes them liable for putting client money into a mutual fund that pays the broker a commission whose annual returns are lower than a fund that pays no commission. The conservative cost of brokers' conflicts is $8 billion to $17 billion a year, according to Obama's Council of Economic Advisers.
Other countries like Australia and the U.K. ban or restrict commissions--most likely because their politicians aren't bought by lobbyists for the industry who unfortunately have more clout on Capitol Hill than Average Joes and Janes.
In another blow to the brokerage industry, U.S. Supreme Court justices suggested they will require 401(k) plans to periodically monitor the investment options they offer, in a case that may give investors more power to sue over excessive fees. More than a dozen companies have been sued over fee issues since 2006.
But here's the "inconvenient truth" about investment advice for 401(k) savers IMHO -- even if the advice is unbiased the vast majority of savers don't need it because their employer likely offers a "one-stop-saving" mutual fund option called a target-date fund.
These funds' portfolios automatically reset their mix of stocks, bonds and cash over time, becoming less risky as they approach their target date. According to BrightScope, funds offered by The Vanguard Group and T Rowe Price regularly rank among the top 20% of their peer groups over the long haul. And you don't need advice to know where they rank--you simply need to Google the name of the fund and Morningstar's ranking pops right up. Vanguard's Total Stock Market fund gets a four-star rating from Morningstar. Who needs advice?
Broker fees often kick in when workers change jobs and roll their money into an IRA; Americans shifted $321 billion from 4019k)s to IRAs in 2012, according to Cerulli Associates. It's not clear whether employees at small companies, who are less likely to have fund options from big mutual fund companies such as Vanguard Group or Fidelity Investments, are at greater risk. A Fidelity spokesman said broker commissions are not paid when participants invest in a fund at work or in a rollover IRA.
Along with supporting objective and low-cost investment advice for 401(k) participants, a new group called Saveourretirement.com says one of the most important challenges facing Americans is knowing how much to save. What's really bizarre is that it's likely that they aren't getting that advice or they're getting a one-size-fits-all contribution rate, whether the worker is 24 or 42. A Vanguard spokesperson put the rate at 12 to 15% of pay, which includes employer contributions, so that would lower the participant contribution to 9 to 12% of pay, since the employer's contribution rate is typically only 3%. A Fidelity spokesman said that the rate should be a combined 10 to 15% of pay from the employer and employee.
Unfortunately, this makes no sense whatsoever. If your daughter is saving up a portion of her allowance to see a movie, how much she needs to save depends on when she's going to the movie.
As I testified before the Department of Labor in 2007, with the input of pension actuary James Turpin, assuming a typical employer contribution rate of 3% of pay, the only way to reach retirement adequacy without banking a huge chunk of your paycheck is to start contributing at age 25 and save 10% of your salary. The longer you wait, the greater the required contribution: it's 17% of pay if you wait until age 35, more than 23% if you postpone until age 40 and a whopping 48% of pay if you wait until age 50. Needless to say, this over-50 requirement flies in the face of the meager current $6,000 limit on "catch-up contributions" currently allowed by the IRS.
Hopefully the next and most important step will be to address the inadequate employer contributions to 401(k) accounts, which is the major driver behind the retirement crisis, which 86% of Americans think we face. But at least it's a step in the right direction.