Retirement and financial security are issues that are not often discussed by the general news media and most politicians (except Progressives), but these are major events affecting people worldwide.
In the U.S., here are some retirement-related news events worth noting:
Americans Not Saving Enough for Retirement; 40% Have Saved Nothing
A new study by Fidelity found that as of Q2 2018, most 50-something Americans between 50 and 59 years old with a 401(k) had an average balance of $174,200 and were contributing 10% of their paychecks. On average, employers were matching 4.9%, putting the total savings rate for this group at 14.9%. While this is an improvement over the past years, Fidelity said “their nest egg may not be big enough: If you earn $50,000 a year, you should have $300,000 in savings by age 50. If you earn $75,000 a year, you should have $450,000 in savings by 50.” But there is also bad news: GOBankingRates found in a 2017 report that 40% of older Gen Xers (those aged 45-54) and 33% of baby boomers (55-64) have no retirement savings.
Financial Pros Should Recognize That the Retirement Crisis Is Now Permanent
Financial professionals should recognize that the lack of retirement savings is now a permanent feature of American society. In this article on this site, it is evident that most Americans cannot retire with any sense of financial security. If you want to build your practice on trying to find clients with $1 million in assets, your search is going to become more difficult. Current Republican policies will not grow your business over time, so maybe it is time to re-think your business philosophy and work to grow the economy for all and this means much more than just passing a temporary tax cut.
Concern over retirement security is a major concern for Americans. A poll by Prudential Financial found that American workers rank retirement security as the top issue they want Congressional candidates to talk about in upcoming national and local elections in 2018. The survey of 2,000 respondents found that 80% thought this was the most important issue followed by job security (75%), taxes (74%), workforce development (70%), the minimum wage (67%), and college costs (61%).
Income inequality is a major factor that hurts all democracies, but it not only affects people who are working, but also those who have retired. A new study by the Urban Institute found that since Social Security benefits are based on the amount of income earned during a worker’s lifetime, that amount also translates into a skewed retirement benefit (as a result of the wage gap) that continues into retirement.
When inflation is added into the formula, that gap only increases. A story on CNBC said “People who fall near the bottom of income distribution, after factoring in inflation, have actually seen their wages decline over the past few decades, according to the institute.”
This gap means people aged 67 to 75 in the top fifth of the income distribution will see their income increase by 3% in 2045, 5% in 2065 and 7% in 2085, the researchers found.
“On the other hand, those aged 67 to 75 in the bottom fifth of the income distribution will see their income fall by 3% in 2045, 6% in 2065 and 13% in 2085.”
And even worse, no politicians are even addressing the permanent retirement financial crisis.
Fiduciary standard still under fire after a decade of lobbying. The move to give average investors an even break when it comes to getting objective product advice from financial advisors is still under attack from the Republican-dominated SEC and Congress.
New report cites need for conflict-of-interest protections. A new report from the Public Investors Arbitration Bar Association (PIABA) suggests 12 specific ways to improve conflict-of-interest protections, protect investors’ best interests, and ensure adequate and clear disclosure to investors. Written by attorneys Andrew Stoltmann, Chicago, Ill. and Melinda Steuer, Sacramento, Calif., the report addresses deficiencies in the SEC’s “best interests” standard for financial firms and brokers who provide financial advice and products to individual investors.
The report states: “There is an overwhelming need for a strong, investor centric best interest standard. Americans are woefully unprepared for retirement and meeting other financial goals. Decades of conflicted advice and high fee investments by brokerage firms directly led to this crisis. Half of all Americans have less than $10,000 in savings, and nearly half of the oldest Baby Boomers are at risk of not having sufficient retirement resources to pay for basic retirement expenses and healthcare costs.4 The Center for Retirement Research at Boston College estimates that our “retirement income deficit” is $6.6 trillion. That number represents the gap between the pension and retirement savings that American households have today and what they should have today to maintain their standard of living in retirement.”
Along with income inequality, the demise of pensions, job insecurity and stagnant real wages, the conflicts-of-interest that underlie the financial services business have also pushed unsuspecting, uninformed individual investors into high-priced financial products that benefit brokers and financial firms more than the retiree. For instance, as noted in my book,
revenue sharing and 12b-1 fees alone costs individual investors at least $9 billion annually. The SEC’s foot dragging on the fiduciary standard (a basic plea for transparency and disclosure to show conflicts-of-interest) shows how the financial industry continues to work against its own clients.
Re-visiting revenue sharing. Most 401(k) and pension plan participants don’t know the first thing about an old, established conflict-of-interest that is widespread in the financial business. That practice is revenue sharing. If you don’t know about it, you should since it certainly hurts the net returns of average investors.
Revenue sharing is covered in my book How 401(k) Fees Destroy Wealth, but it is was posted in LinkedIn by attorney and pension expert Chris Tobe in an article from Plan Sponsor. Basically, revenue sharing is defined as “the secret sauce that makes plan economics work.” In this case, the article is aimed at the companies that are plan sponsors, or those which create and manage 401(k) and pension plans. But revenue sharing is a core sales practice and it extends to mutual funds, annuities and most financial products that are sold to investors in or out of a retirement plan.
As this relates to 12b-1 fees, the article notes that “12b-1 fees being paid directly to the broker, there are two issues that should be of concern to the plan’s fiduciaries. They both center on the reasonableness issue. How much are they getting, and what are they doing to earn it? Since it’s going directly from the fund company to the broker, you can’t intercept this money. The broker is going to get it. So, the question turns to the value the plan is receiving from the broker. Some brokers earn their keep and others are largely absent.”
This raises the fiduciary issue again (the same one the SEC has been debating for the last decade), and it may mean there is a fiduciary violation if the plan sponsor does not understand these fees and what they are being used for. For individual investors, it means you may be paying for something you are not receiving. Over decades of 401(k) or pension contributions, this can add up to hundreds of thousands of dollar, so pay attention and ask questions. It’s your money after all.
If you are a RIA or financial services firm that wants to find like-minded clients, consider posting a notice on this site that lists your pro-investor business case. The listing information is available on the front page of this site. This information can be accessed by clicking on the Business Listings and Submit Listing tabs.