Retirement planning and the mutual funds industries were the focus of Frontline‘s “The Retirement Gamble” Tuesday, and it was an eye-opener for many of the millions of Americans who save via 401(K) or IRA accounts.
Most American savers are vastly unaware about the corrosive effect of fees on their retirement savings, Frontline correspondent Martin Smith said.
John Bogle, founder of Vanguard, the world’s largest mutual fund company and pioneer of low-cost index funds, gave Smith an example.
Assume you are invested in a mutual fund, Bogle pointed out, with a gross return of 7 percent, but that the mutual fund charges you an annual fee of 2 percent.
“Over a 50-year investing lifetime, that little 2 percent fee will erode 63 percent of what you would have had,” Smith said. “As Bogle puts it, ‘the tyranny of compounding costs’ is overwhelming.”
So what can you do to avoid the impact of fees? Experts say you can come close by buying index funds.
Index fund fees can be a tenth of what the average mutual fund charges. And over time, on average, index funds perform “better than their more expensive actively managed fund cousins,” Frontline said.
So why aren’t financial advisers telling consumers to buy index funds?
Even though an index fund might be a better option, a broker operating under a “suitability standard” has no incentive to sell it. The broker will make higher commissions from options that have higher fees, Smith said.
“Big banks, brokerages, insurance companies and other financial service providers operate under something called a suitability standard — which says they don’t have to give you the best advice, just advice that isn’t too egregiously terrible,” Smith said.
Here’s a Frontline excerpt:
Let’s say you sit down with an adviser at your brokerage or bank and ask for some advice on how you should allocate your retirement savings, or which funds you might want to choose for your IRA. You’ll get lots of advice, but chances are it won’t be worth much. Eighty five percent of all financial advisers and financial planners are really just brokers or salesman.
Their incentive is to sell you a product that makes them a higher commission, not necessarily a product that maximizes your chances of saving more. Only 15 percent of advisers are “fiduciaries” — advisers who by law must operate with your best interests in mind.
Last year, the Obama administration proposed a rule to mandate that all financial advisers and financial planners would have to adopt a fiduciary standard when it came to employee retirement accounts such as a 401(k) or IRA account.
The financial services industry, which manages more than $10 trillion of retirement accounts, thought this was a bad idea and pushed back hard with a furious lobbying campaign.
Smith: “This would be way too expensive, the industry said; if we have to provide such a standard of service, we will either have to pack up and find another business line, or have to pass the increased costs on to our customers. The Obama administration pulled their proposal last fall.”
See Frontline‘s The Retirement Gamble