conflicts-of-interestDOL regulationseconomic justiceFinancial journalismHow 401(k) fees destroy wealthNeoliberalismStagnant real wageswage stagnation

Why the Investment Industry Ignores the Retirement Crisis

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With over $19 trillion under management and the largest political lobby in Washington, you would think the investment industry, comprised of global banks, investment firms, U.S. registered investment companies and the insurance industry, would have a vested interest in seeing that more Americans enjoy a financially comfortable retirement.

But if you believe that, you would be wrong.

Of course, the public message from these firms is that the right amount of savings, diligent contributions to a 401(k) and professional management from one of the large money manager firms would be able to achieve the idealized version of retirement, complete with golf, enough to eat and possibly that annual vacation.

But the number show this is not the case.  In repeated studies from such retirement experts as the University of Michigan Retirement Research Center, the Center for Retirement Research and many independent academic and U.S. Department of Labor studies, the news for retirees is dismal.

  • “…the vast majority of Americans have under $1,000 saved and half of all Americans have nothing at all put away for retirement.” (CNBC)
  • “Nearly half of families have no retirement account savings at all,” the Economic Policy Institute (EPI) reported, even in savings vehicles such as IRAs and 401(k)s. The median for U.S. families is just $5,000, and the median for families with some savings is $60,000.”
  • “Across all age groups, the report found that more than half of consumers plan to dip into retirement savings by withdrawing money as needed to cover basic and discretionary spending, which it said carries a high risk of depleting assets, especially among those who live to an advanced age.” (Insured Retirement Institute)

So with all the bad news, you would think that the investment industry has the political and financial power to enlarge their client-investor base to manage more money, improve the lives of millions of people and encourage faith in the capitalist system.

But that is not happening. Nor, is it likely to happen.

There are many reasons for this, but the basic one is that the common sense model of expanding the savings opportunities and increasing the level of take-home wages to decrease the historically high wealth gap makes too much sense.  Also, the neoliberal approach that dominates the financial industry does not account for this economic externality (increasing wages) since it is not accounted for in the nation’s fiscal and monetary policy, as well as in the business models of the nation’s largest investment firms.

In short, it looks like there are many large investment firms that dislike their own customer-investors.

Money management is highly profitable given the right business model and too often that model has a winner and a loser.  The loser is the average investor who, especially in employer-directed 401(k) accounts, is often burdened by high fees and a limited number of expensive funds provided by the 401(k) s record keeper and fund administrator, both of whom often are the same plan’s investment manager.

This obvious conflict between the investment industry and its own customer-investors is off the radar screen in financial journalism. Its just an anomaly that most financial journalists accept as being part of the neoliberal system, that also requires wage disparities, privatization, anti-union and anti-consumer activities.

Neoliberal policies are also an inherent part of the Fed’s fiscal and monetary policies. It is a reason why wage growth under the 19-year tenure of Alan Greenspan (a follower of Ayn Rand) and afterwards has been subordinated in favor or containing inflation.  Inflation is bad for Wall Street (the investor class), while wage growth is good for the average American.

One good example came in early February 2018 when the stock market became volatile when news of a wage increase upset investors. As reported in The Intercept: “The recent Dow Jones fluctuations have very little to do with a legitimate fear of inflation. The stock market panicked largely because CEOs and shareholders fear that they’re losing their upper hand over a workforce that’s cutting increasingly into their record profits.”

No Society Survives Long With a Large Wealth Gap

This helps explain why wage stagnation is attributed to the demise of the middle class. It also was a basic campaign issue from Progressive Democrats during the entire 2016 election (Hillary Clinton caught on to this basic fact later is her campaign) and it continues to be a driving force today in explaining the lack of faith in the federal and state governments, the rise of nationalism, to crushing student debt and the opioid epidemic.

While this is not the sole cause, the wealth gap and wage stagnation are main reasons for the nation’s huge political polarization. When the money issue is combined with cultural and extreme politically-motivated attacks against anyone floating a rational debate, we have all the ingredients for an ungovernable, unstable society. We may be at that point now.

All, all this brings us back to the professional, global investment industry and why they are not addressing the retirement crisis.  Do they think that proposing a political-economic remedy will hurt their bottom line? Will any proposal open the debate about the merits of capitalism and its current inequitable operations? Or, will it require the investment firms to create a new business model that re-prioritizes the roles of compensation, bonuses, and disclosure to average, unsophisticated clients with small amount of money to invest?

Nowhere is this more evident than in the decades-long debate over an esoteric regulation involving the fiduciary standard proposed by the U.S. Department of Labor (DOL) in 2012.  Since then, the financial services industry has spent hundreds of millions of dollars in lobbying fees and campaign contributions and in PR campaigns beating back a straightforward rule that says a financial professional suggesting certain investment products and strategies to a client has to disclose any conflicts of-interest that would not be in the best long-term interests of the investor.

“The Dept. of Labor’s definition of a fiduciary demands that retirement advisors act in the best interests of their clients and put their clients’ interests above their own.”

Sounds simple enough, but this ethical regulation runs against the investment industry’s business model. In a simple mutual fund, the industry has buried 17 separate fees, according to the DOL.  As described in my book, How 401(k) Fees Destroy Wealth and What Investors Can Do To Protect Themselves, investment fees of just 3% annually can devour up to 50% of investment returns, according to professor Burton Malkiel. In a 401(k) investment, the difference between an index return and your fund’s return is due to fund expenses, according to Nobel Laureate William Sharpe.

In the investment industry this is old news, but you rarely hear about it from financial TV and print commentators. In the mutual fund industry, any discussion of fees automatically triggers a review from the Compliance Department and gets the attention of the highest managers.

So it is not surprising that on March 15, a three-person Federal Court ruled against a suit advocating for the fiduciary standard by a vote of two to one. The two judges voting against the fiduciary standard were both Republicans and were following the demand from the Trump administration. 

The nine plaintiffs in the 5th Circuit case included the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association and the Financial Services Institute, which are all on-record as opposing the fiduciary standard since its inception.

The court also said that disclosing fees and commissions has altered the way some firms conduct business. The fiduciary rule “has already spawned significant market consequences, including the withdrawal of several major companies, including MetLife, AIG and Merrill Lynch from some segments of the brokerage and retirement investor market. Companies like Edward Jones and State Farm have limited the investment products that can be sold to retirement investors.”

These are also some of the same firms, and certainly not all, that have spent millions of dollars opposing the fiduciary standard and never addressed the root cause of the retirement crisis.

So the next time you decide to choose a financial advisor, just ask the simple question: “Do you, the advisor, represent me or yourself?”

If the answer is not straightforward, get up and leave. That will be a move that can save you many thousands of dollars over time.

 

 

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Chuck Epstein

Chuck Epstein

Chuck Epstein has managed marketing communications and public relations departments for major global financial institutions and participated in the launch of industry-changing financial products. He also has written by-lined articles for over 50 publications, five books and served as editor and publisher of nation’s first newsletter on the topic of using the PC for personal investing and trading. (“Investing Online, 1994-1999). He also is a marketing consultant, writer and speaker on topics related to investor protection and opportunities in the very dynamic cannabis industry.

He has held senior-level marketing, PR and communications positions at the New York Futures Exchange, Chicago Mercantile Exchange, Lind-Waldock, Zacks Investment Research, Russell Investments and Principal Financial.

He has won national awards from the Mutual Fund Education Alliance (MFEA) and his web site, www.mutualfundreform.com, was named best small blog in 2009 by the Society of American Business Editors and Writers (SABEW).

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