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Learn how fees, self-dealing and kickbacks profit Wall Street while imperiling our savings.
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00:00Tonight on Frontline, America's retirement crisis.
00:21It's tough to really worry about retirement right now.
00:23I guess plan B would be to keep working.
00:26My retirement plan is fingers crossed and pray, basically.
00:31Even if you have a 401k or IRA, will you have the money you need to retire?
00:37If you make a $100,000 a year, you need $1.5 million to be okay.
00:41A lot of 401k programs are lousy.
00:44You put up 100% of the capital, you take 100% of the risk, and you get 30% of the return.
00:49Correspondent Martin Smith investigates.
00:51Make it simple.
00:52That's a question that can only be answered on what your risk appetite is.
00:57If you don't want...
00:57This isn't making it simple.
00:59Well, I wish it was simple.
01:02If you want to gamble with your retirement money, be my guest.
01:07Tonight on Frontline, the retirement gamble.
01:11Frontline is made possible by contributions to your PBS station from viewers like you.
01:26And by the Corporation for Public Broadcasting.
01:29Major support for Frontline is provided by the John D. and Catherine T. MacArthur Foundation,
01:34committed to building a more just, verdant, and peaceful world.
01:37More information is available at macfound.org.
01:41Additional support is provided by the Park Foundation,
01:44dedicated to heightening public awareness of critical issues.
01:48The Ford Foundation, working with visionaries on the frontlines of social change worldwide
01:53at fordfoundation.org.
01:56The Wincote Foundation.
01:58And by the Frontline Journalism Fund, with major support from John and Joanne Hagler.
02:03The Wincote Foundation.
02:04The Wincote Foundation.
02:04The Wincote Foundation.
02:08The Wincote Foundation.
02:08The Wincote Foundation.
02:09David C. MacArthur Foundation.
02:15Increasingly, Americans in money trouble, in this bad economy, are borrowing...
02:21And the number of workers borrowing from their accounts has reached a ten year high.
02:26A record number of workers now rating their...
02:28Let's begin with one simple fact.
02:32America is facing a retirement crisis.
02:36And the statistics are grim.
02:39Half of all Americans say they can't afford
02:42to save for retirement.
02:43The average retirement fund has lost $12,000.
02:46One third have next to no retirement savings at all.
02:49Hitting the need for many Americans to work longer
02:53and save more for retirement.
02:55I just don't know if I'll be able to save that much.
02:57People with shrunken retirement savings.
02:59God willing, Social Security will still be there.
03:01For someone like me, it'll probably be enough
03:04to keep me out of poverty.
03:05Retirement fund gets sliced and diced and divvied up
03:07for Wall Street to play with.
03:09I'm just going to have to somehow find a way
03:11to save 10% of my salary or 15% of my salary,
03:14which is probably what I need to actually be saving
03:18to have any shot of retiring, you know, not on food stamps.
03:25Yeah, I don't know.
03:29Hope.
03:30Hope to be able to retire.
03:36Recently, I've started to look into how to make more money,
03:40how to increase my income while still teaching.
03:44It's tough to really worry about retirement right now
03:47because I know it's so far off.
03:49And I know that worrying and stressing over it
03:51is an easy thing to do.
03:54But I'm also of the mindset that as long as I don't have
03:58too many bills or anything, too many debts,
04:01then I could essentially live off of whatever I get.
04:06I guess plan B would be to keep working,
04:09but I'm really banking on plan A.
04:13Otherwise, yeah, no, I don't have a plan B.
04:20It's hard to imagine, even at this point in my life,
04:24being retired.
04:27I just don't see it, you know,
04:29living the American dream of having your house
04:32and being able to retire.
04:35Nobody has a pension anymore.
04:36It wasn't like it was in the 60s or 70s
04:40where people worked for, you know, good companies
04:43and had a pension plan.
04:45I think that's a harsh reality for a lot of people.
04:47I think, and I do think that we'll be working until,
04:53we'll definitely be working until our probably mid-70s,
04:56I would, if I had to make a,
04:59unless we can make up some big ground soon.
05:06You know, I consider myself middle class.
05:09I don't have the luxury of a couple million dollars
05:12in savings.
05:13The cost of living is going up.
05:19Your water bill goes up,
05:20your utility bill goes up,
05:22your gas bill goes up,
05:23your food goes up.
05:25Retirees are getting stressed
05:28because their nest eggs, their savings,
05:30are not producing any income for them.
05:33So they're all wondering where they're gonna make ends meet.
05:38I'm fortunate I can live at a higher standard
05:40because I have a little bit of a nest egg
05:42in, in my retirement savings.
05:44But others, they're at poverty level.
05:50As for me, I'm almost 65.
05:54I started saving for my retirement in my late 20s.
06:00But along the way, I dipped into my nest egg,
06:03not once, but several times.
06:05So this is my IRA and 401K,
06:07which will be cleaned out over a certain amount of time.
06:10And now, like millions of other baby boomers,
06:12I, too, don't have enough.
06:14The key to your retirement working out
06:17is having enough return on your assets.
06:22Most of my savings went to pay for my kids' educations.
06:25Well, this is where fees would really hurt you badly.
06:28This is where fees would hurt you badly.
06:30A divorce and the crash of 2008 didn't help either.
06:34Well, it looks like my own personal fiscal cliff.
06:36I'm now planning to work for as long as I possibly can.
06:40So this whole plan is predicated on working full-time until 70.
06:46Yes.
06:47And at 70...
06:48From age 70 to 75, I have you working part-time.
06:58These days, many baby boomers are planning to delay their retirement.
07:01Some may never stop working.
07:04It's hard.
07:05Without knowing exactly how long you're going to live,
07:09it's difficult to guess how much you need to put away.
07:12Most people seem to feel that, at retirement, to be okay,
07:18you need 10 or 12 times pay, and maybe 15.
07:21So if you make $100,000 a year, you need $1.5 million to be okay.
07:26You need to save more. You need to start sooner.
07:29You can't start work when you're 20 or 22
07:31and decide to get serious about this in your 40s.
07:34The boat has sailed.
07:39So what can we do?
07:42Today, Americans entrust over $10 trillion
07:45to thousands of big and small financial service providers.
07:49Okay, click. I just bought stock.
07:51You just saw me buy stock. No big deal.
07:54With expensive marketing...
07:55...not headed for bingo.
07:57...these companies compete for our money.
07:59You got to buy.
08:00Yes. Time for picking. Time for buying.
08:02...to a super, super strong...
08:04But there's so many choices, it's hard to understand.
08:07When it comes to mutual funds,
08:08it's often hard to tell what you're looking at.
08:10Rather than a system, it's more like a free-for-all.
08:13I don't really see it as a real system.
08:15I see it as maybe a retirement mess is a better word for it.
08:19Looking for real-life answers to your retirement questions?
08:22If you're lucky, you have a 401 .
08:25Roughly half of companies offer a 401 .
08:27If you work for a small business, chances are you might...
08:30you don't have access to such a thing.
08:32Some companies then offer other supplements.
08:35And then, of course, there's things you can do on your own,
08:37like the individual retirement account.
08:39So it's entirely confusing.
08:42Right.
08:43So where does one begin?
08:45Let's talk about that 401 you picked up back in the 80s.
08:47About 60 million Americans have signed up
08:49for their company 401 plan.
08:52These are your 401 election forms.
08:54As you can see, there are numerous options to choose from.
08:57And remember, this is your retirement.
08:59So make your selections carefully.
09:01But most people remember their first 401 meeting as dumbfounding.
09:06Any questions?
09:08I had no idea.
09:10I was so confused.
09:11I came out of that meeting, and I was like, oh, my God.
09:13It was just, it was overwhelming for me,
09:15the knowledge that you had to have in order to invest.
09:17I really was kind of clueless.
09:19I didn't know what I wanted to invest in.
09:21I really didn't know anything about it.
09:23I had learned somewhere, some...
09:25I had heard something about if you're young,
09:27you should be more willing to take risks.
09:29You have time.
09:30So other than that, I really knew nothing.
09:32And that's one of the best aspects of this.
09:34I showed you the plan.
09:36You either had your choice,
09:38between an aggressive investment, moderate or conservative.
09:42You know, there was nobody there managing my money.
09:46It was all up to me.
09:47So traditional pensions don't necessarily
09:49let you take it all in a lump sum.
09:51The 401K is one of the only products that Americans buy
09:54that they don't know the price of it.
09:56It's also one of the products that Americans buy
09:58that they don't even know its quality.
10:00It's one of the products that Americans buy
10:02that they don't know its danger.
10:04And it's because the industry,
10:06the mutual fund industry,
10:07have been able to protect themselves
10:09against regulation that would expose
10:12the danger and price of their products.
10:14It used to be much easier.
10:22In 1970, 42% of employees had a pension,
10:26a guarantee by your employer that you would get
10:28a good percentage of your salary and benefits
10:30upon retirement.
10:33This is the life.
10:38What with my retirement plan
10:40and a few dollars I'd saved,
10:42I didn't have a thing to worry about.
10:46Workers didn't have to figure out
10:48how to manage their own savings plan.
10:50It was done for them.
10:52It was very simple.
10:53The employee really didn't know
10:54any of the mechanics behind it.
10:56They just knew when they came close to retirement
10:58that they were promised a benefit,
11:01so a secure income over their entire life.
11:04So they had this income until they died.
11:07And so what was wrong with that system?
11:09Absolutely nothing, to be honest.
11:12It was a great system.
11:13The problem was that over the last decade,
11:16the rules of the game changed.
11:20What changed was that people started living longer.
11:23New accounting rules, global competition,
11:26and market volatility too affected the cost
11:28of maintaining a pension plan.
11:30The old system became an expensive system,
11:33I think, from an employer standpoint.
11:36They have to know how to manage investment risk
11:38and they have to know how to manage longevity risk.
11:41And they have to spend a good deal of money.
11:43And they have to spend a good deal of money.
11:44And if the market doesn't do what they hope it will do,
11:48you know, they can lose some of the cash
11:51that they've actually put in from a funded status standpoint.
11:53So it's pretty complex.
11:55Our major concern is to protect our accounts against risk...
11:59It was then that corporations found a new loophole
12:02in the Internal Revenue Code.
12:04What essentially happens is that the 401k comes in
12:08in the late 70s, early 80s.
12:10It starts as a corporate tax dodge.
12:12Basically, it's if you're a high earner,
12:14you're going to put some of your money aside.
12:16Nobody ever thought that this was going to apply
12:18to the rest of us.
12:19I mean, there was never any thought of it.
12:21So not quite by design, a new retirement system was born.
12:28Big brokerages and banks saw an opportunity
12:32to expand their business
12:34and helped employers set up and run their new plans.
12:38They promoted the arrangement as a win for everyone.
12:40From the individual perspective, the 401k actually opened up
12:45the opportunity to save for retirement
12:47for many individuals who worked for businesses
12:49that didn't have a pension.
12:51And it also allowed them to have a portable,
12:56vested amount of money that they could take with them
12:59as Americans started changing jobs more frequently.
13:02It's as simple though, isn't it, as the businesses decided
13:06to get out of the business of providing pensions
13:10and shift the burden to employees.
13:14I would express that more as a sharing of the responsibility
13:18for retirement between employers and employees.
13:22But while some employers contribute to employees' 401k plans,
13:26all of the risks fall on the individual.
13:29401k plans really place the burden on the individual participant
13:36to have an adequate retirement.
13:39And the vast majority of ordinary people
13:45don't know how to do that.
13:46It's a very complex task.
13:48We wanted them to be able to figure out
13:50how much they needed to save for retirement,
13:52how to invest that money,
13:54and then once they had a lump sum once they retired,
13:56how to withdraw the money
13:58so they didn't outlive their assets.
14:00So that's three different risks.
14:02Picking and choosing the right investments
14:05requires very careful handling.
14:07Enter the mutual fund industry.
14:10People in the mutual fund industry realized
14:12that there was a huge opportunity here, right?
14:14I mean, not only could they sell their mutual funds,
14:18you know, directly to investors,
14:20but they could make the mutual funds
14:22the very foundation of the 401k plans.
14:25In 1981, nobody knew what a 401k was.
14:29By 1989, it's in the lexicon, it's being written about,
14:33it's being talked about.
14:35By throughout the 90s,
14:37now all large employers effectively have plans in place.
14:42People are participating.
14:43It continues to grow from there.
14:45Start saving $300 a month when you're 23,
14:48and you can retire a millionaire.
14:50The boom happened in lockstep
14:52with the roaring bull market of the 80s and 90s.
14:55Mutual funds were charging high management fees,
14:58but nobody seemed to care.
15:00The returns are great, so no one thinks about
15:02how much does this cost to me
15:03when they're earning 15 or 20 percent.
15:05Star mutual fund managers
15:07like Fidelity Magellan's Peter Lynch
15:09encouraged all of us to jump in.
15:11You shouldn't be intimidated.
15:13Everyone can do well in the stock market.
15:15You have the skills.
15:16You have the intelligence.
15:18It doesn't require any education.
15:20All you have to have is patience,
15:22do a little research.
15:23You've got it.
15:24Saving for retirement seemed as simple
15:27as betting on the market.
15:28It was a great time.
15:30Employees who participated in these plans
15:33and invested in the stock market,
15:35you know, couldn't wait to open
15:37their monthly statements
15:39to see how much the value had gone up,
15:42you know?
15:43So things seemed to be working nicely.
15:47Well, I was invested in everything.
15:52Stocks, mutual funds, you name it.
15:55We would get monthly reports.
15:58Things were growing.
15:59Everything was growing.
16:00In the 90s,
16:02you could not lose money in the market,
16:04even if you were a dumb investor.
16:06I mean, it just kept growing and growing
16:08and growing and growing.
16:09Internet stocks drove a powerful surge
16:11in Wall Street today.
16:12Internet stocks suddenly...
16:13The economy was doing great.
16:15I mean, you had all kinds of gains
16:17in the stock market.
16:18That was kind of the dot-com era.
16:21Internet stocks continue their meteoric rise.
16:24You really didn't have to pay attention to,
16:26you know, you got your statements
16:28at the end of every quarter
16:29and you were making money.
16:31It was exciting because
16:33just gradually over time,
16:36we would have a day
16:38where we would make $7,000
16:41as much as $30,000 in a day
16:46as it built and even more.
16:49In 1996,
16:51we had like doubled our money.
16:53We had like 400,
16:54almost 500,000.
16:56Steve Shulow and Dan Robertson
16:58believed they were headed
16:59for early retirement
17:00the day their portfolio
17:01topped $1 million.
17:03It was November 11th, 1999.
17:08Oh, that was a very nice day
17:10that day, wasn't it?
17:11What happened November 11th?
17:13See, it's when our portfolio
17:15went over a million.
17:16Oh!
17:17That was just amazing.
17:21It was like,
17:22well, yeah, this is how investments work.
17:26You invest it and it grows.
17:29I mean, that's how I thought about it.
17:32It was a manic Monday
17:33in the financial market.
17:34Stocks plunged.
17:35Traders are standing there
17:36watching in amazement.
17:37I don't blame them.
17:38But in the spring of 2000,
17:40the market collapsed.
17:41A lot of their customers
17:43are freaked out.
17:44We did not know.
17:45This is our mistake.
17:46We didn't know it was a bubble.
17:48We just didn't know.
17:49Our portfolio had gone all the way down
17:51to where it was in 1996
17:54from $1.5 million to $500,000.
17:57$460, I think.
17:58All that was gone.
18:00At the height of the Internet bubble,
18:02Americans had also stuffed 19%
18:04of their retirement money
18:06into company stock.
18:07Did we invest all of our 401k
18:09in Enron stock?
18:10Absolutely.
18:11Don't you guys agree?
18:13For savers like Debbie Skosinski,
18:15who worked for Comdisco,
18:16a computer leasing company,
18:18the fall would be precipitous.
18:20I was close to a half a million dollars
18:23I had in my 401k with company stock.
18:25You know, it was like,
18:27wow, look at all the money we have.
18:28Look at what is happening.
18:30You know, I can retire probably
18:31when I'm 45.
18:36Skosinski not only lost her savings,
18:39she lost her job.
18:40The day I got laid off, I lost it.
18:52I thought, oh my God, I'm a single parent.
18:55I have no job.
18:57I have a house.
18:58I have a house payment.
18:59What do I do?
19:00You know?
19:01And I was scared.
19:03Really scared.
19:05I didn't have much of a retirement left.
19:08I couldn't even borrow against it.
19:11And it was just something that
19:13I never foresaw ever.
19:16You know, losing my job ever.
19:18Never.
19:24The worst was yet to come.
19:26Concerns about shaky home mortgages
19:28are triggering fears of a financial meltdown.
19:30Let's talk about the speed
19:31with which we are watching.
19:32Eight years later, savers were hit again.
19:34The mortgage market is far from over.
19:37This is volatility we haven't seen, of course,
19:39since way before you and I were born.
19:41More trouble ahead for the nation.
19:42When the housing bubble turned into the crash of 2008,
19:46it put retirement even further out of reach.
19:48The economic turmoil of recent years
19:50is putting a comfortable retirement at risk
19:52for many Americans.
19:53It was like, holy smokes, how do you stop the bleeding?
19:56The reality of what you've lost is huge.
19:59I mean, not only have you now lost half of your 401k,
20:04but your house is not worth anything anymore either,
20:07so anything that you thought you were going to have there is gone,
20:11and now half of your 401k is gone.
20:13You know, if it took 13 years to accumulate $80,000
20:17and one year to lose half of that
20:20and then try to get that back in another 13 years
20:23and only be at the $80,000 that you were 13 years ago,
20:28you know, the math doesn't work.
20:31Debbie Skoczynski was already in a hole
20:38with next to nothing to cushion the blow of a second shock.
20:42And now her house was worth less than the loan she owed the bank.
20:46You know, there's some days where it's like,
20:48you just want to go scream, you know, in the backyard and just scream
20:51because you have your choice.
20:53Do you pay this or do you pay this?
20:55Her bills were piling up.
20:58She did what a quarter of Americans have done.
21:01She dipped into what was left of her 401k.
21:04I freaked out when I took the money out of my 401k.
21:08It was hard.
21:09I mean, it's, you know, you never...
21:14Every day on the news, I'd listen to it,
21:16and I'd be like, oh, God, it's really bad.
21:18Will I be able to keep my house?
21:20Well, you know, what if my car breaks down?
21:22I can't afford a car payment.
21:25It just can't be this hard to make money.
21:27I can't.
21:28You know, you hear these big companies
21:30with these people taking these huge bonuses.
21:32You're thinking, well, what happened to the average Joe?
21:35They just don't care.
21:37They made their money already.
21:39Growing outrage over those bonuses...
21:41The year the markets crashed,
21:43Wall Street doled out $18 billion in bonuses.
21:47The latest bonus bombshell is sending shockwaves across Washington.
21:51Robert Hilton Smith entered the workforce in 2003.
22:01He taught for a bit, worked at a coffee shop,
22:05and then went to grad school,
22:07where he ran up $40,000 in student loans.
22:11But on the bright side,
22:13he had no savings to lose during the 2008 crash.
22:17Graduated with a master's in economics,
22:19he was hired at a small think tank in New York.
22:22They had a 401K, and he began to make regular contributions.
22:26But even in a relatively good market,
22:29he began to sense that something else was wrong.
22:32I have a 401K.
22:33I save in it.
22:34It hasn't seemed to go up.
22:36It's awful.
22:38I kept checking the statement.
22:40I'd be like, why does this thing never go up?
22:42This is weird.
22:43I mean, the stock market I knew was up and down,
22:45but I was like, I still should be seeing some returns.
22:48Hilton Smith decided to make a research project out of the subject.
22:53He began by looking at the investment options inside his 401K plan,
22:5722 funds in all.
22:59You know, you've got all these names,
23:01and the names tell you nothing.
23:02It's a balanced fund.
23:03It's a growth fund.
23:04Okay, you know, yes, that's lingo for a certain kind of broad investment strategy,
23:09but really, what the heck does it invest in?
23:11You know, so I went through each of these,
23:14the actual fund prospectuses, which took me an exorbitant amount of time,
23:19because each of these things were, you know, 50 pages long.
23:22They still wouldn't tell you what they were doing.
23:28As he dug deeper, he discovered one fund invested in mortgage-backed securities,
23:33the kind of security that caused the collapse of the housing market.
23:37But that's not what worried him.
23:40I was digging into all the different aspects of it,
23:43and I kept coming back to fees.
23:46So here's the first mention of fees.
23:48This exp ratio right here.
23:51Why would you think that exp ratio means fees?
23:55Hilton Smith found over a dozen different kinds of fees,
23:59including asset management fees, trading fees, marketing fees,
24:03record-keeping fees, and administrative fees.
24:06Fees when you draw money, fees when you take loans,
24:09fees when you actually get money out when you're retired,
24:12which I actually didn't even know about.
24:13I spent a month literally going,
24:15oh, actually, this fee is a subtype of this fee,
24:18and oh, that covers that,
24:20or no, that's another name for that.
24:22It was very opaque.
24:26The average actively managed mutual fund carries an annual expense of 1.3%.
24:36Some funds charge a fee of 2%, and even as high as 5%.
24:43That may not seem very much, right?
24:45You know, you've got $50,000 or $100,000,
24:48and okay, so you lose $500 or you lose $1,000 a year.
24:52That's what you would pay to a financial advisor, right?
24:55But if you add that up over 20 or 30 or 40 or 50 years in a 401 plan,
25:01all of the sudden you're well into the six figures as your balance grows.
25:05And that's the difference between running out of money before you die
25:08or having a little money left to pass on to your heirs.
25:12A lot of 401K programs are lousy.
25:15The fund choices stink.
25:17The fees are outlandishly high.
25:21And in many cases, you can take two next-door neighbors,
25:26you know, living on Maple Street in any town USA,
25:30and one person is paying 10 times as much to invest in a 401K as the other person.
25:41To understand this fee business,
25:43I went to talk to someone who has thought long and hard about it.
25:47Jack Bogle, the founder of Vanguard,
25:49a company that offers some of the lowest fee products on the market.
25:54He says that if you want to improve your retirement outcome,
25:57make sure to minimize Wall Street's take.
26:01Costs are a crucial part of the equation.
26:03It doesn't take a genius to know
26:05that the bigger the profit of the management company,
26:08the smaller the profit that investors get.
26:10The money managers always want more,
26:12and that's natural enough in most businesses,
26:14but it's not right for this business.
26:19Bogle gave me an example.
26:21Assume you're invested in a fund that is earning a gross annual return of 7%.
26:26They charge you a 2% annual fee.
26:29Over 50 years, the difference between your net of 5%,
26:33the red line, and what you would have made without fees,
26:36the green line, is staggering.
26:39Bogle says you've lost almost two-thirds of what you would have had.
26:44What happens in the fund business is the magic of compound returns
26:49is overwhelmed by the tyranny of compounding costs.
26:53It's a mathematical fact.
26:55There's no getting around it.
26:56The fact that we don't look at it, too bad for us.
27:00What I have a hard time understanding is that 2% fee
27:03that I might pay to an actively managed mutual fund
27:07is going to really have a great impact on my future retirement savings.
27:13Well, you have to rely on somebody to get out of compound interest table
27:18and look at the impact over an investment lifetime.
27:21Do you really want to invest in a system
27:24where you put up 100% of the capital,
27:26you're the mutual fund shareholder,
27:27you take 100% of the risk,
27:29and you get 30% of the return?
27:32I wanted to know how others would react to Bogle's claims.
27:37JPMorgan Chase offers more than 100 mutual funds
27:42that charge anywhere from less than half of 1%
27:45to more than 2.5% annually.
27:48I want to get your reaction to an example that Jack Bogle gave us,
27:53and that is that if you invest over a 50-year investing lifetime
27:57in a mutual fund, making 7% a year on average,
28:01but you're paying 2% in fee for that,
28:04that that 2% will erode something like two-thirds of your gains.
28:15So, the lower fees relative to any given investment
28:22will always result in higher accumulation?
28:24But is his example correct?
28:25I mean, it's shocking that you would be giving up two-thirds of your-
28:29So, I don't know the math behind the example that you're citing.
28:34But does it sound correct?
28:35It sounds, um, it sounds high.
28:43It had sounded high to me as well.
28:45So, I took Bogle's advice,
28:47found a compounding calculator online,
28:50and used a simple example in order to isolate the effect of fees.
28:55Take an account with a $100,000 balance
28:58and reduce it by 2% a year.
29:01At the end of 50 years,
29:03that 2% annual charge would subtract $63,000 from your account,
29:08a loss of 63%,
29:10leaving you with just a little over $36,000.
29:14the $5,000.
29:20Most investors are unaware of all the types of fees they're paying.
29:25Okay.
29:26So, as soon as everybody's actually seated,
29:27we'll go over what's going on.
29:28Crystal Mendez started saving for retirement in her early 20s,
29:31but she rarely looked at her account
29:33and just assumed it was doing well.
29:35One day, my fiancé was looking at his retirement,
29:38and he was essentially bragging about how great he was doing.
29:41So I pulled out my annual report, and we kind of compared notes,
29:45and I realized that he was doing far better than I was.
29:49He basically said, honey, I think you're getting ripped off.
29:52We should look into this.
29:54After looking at the fine print, Mendez found out
29:57that not only was she paying high fees,
29:59she was invested in an annuity with a high surrender fee,
30:03a penalty for any early withdrawals.
30:06I think it was 10 percent was the surrender fee.
30:09So I was, like, you know, battling with myself.
30:11Do I really want to give these people my money
30:13or leave it there, and then I won't have a surrender fee?
30:16But I think in the end, I just said, forget it.
30:19They can have the fee, and I'll move on with the remainder of my money.
30:24All this talk of fees made me curious about my own 401 .
30:29I run a small company with a handful of employees.
30:32We make documentaries for Frontline.
30:35But we're too busy to look at the fine print of our retirement plan.
30:40But while putting together this report,
30:42I went online to look at what my plan was offering.
30:45The funds that I'm allocated to, if you look at...
30:49I found what Hilton Smith found.
30:51Confusing tables of all sorts of products with different kinds of fees.
30:55But it doesn't have any sort of ticker on it.
30:58But those are proprietary mutual funds.
31:00Right. They have 434. But AXA, because they're an insurance...
31:03I even found this offering, the American Century Livestrong Fund,
31:07a mutual fund co-branded with Lance Armstrong's Cancer Foundation.
31:12How did this get here?
31:14How do funds like these get into my plan in the first place?
31:20In seeking an answer, I came across another family of fees.
31:26It works like this.
31:28In order to get their offerings placed on employer 401 menus,
31:32mutual funds rely on brokers and plan administrators.
31:36In return, the brokers ask for a payment or revenue share.
31:44It's a kind of pay-to-play arrangement, or as some say, a kickback,
31:48that adds another layer of cost to retirement plans.
31:51A lot of people use a term like kickback,
31:54because in some ways, it is.
31:57It's a legal kickback.
31:58There's nothing against the law about it.
32:01But it is a sort of, you scratch my back, I'll scratch yours,
32:05kind of arrangement.
32:06If you sell our funds, you will get a portion of the revenue we earn
32:13from selling them through you.
32:16This is a kind of sub-rosa part of this industry,
32:19and there's not a lot of information about it.
32:21But the fact of the matter is, as far as I know,
32:23that those kind of payments to brokers for distributing your shares
32:26has simply become part of the system.
32:28You know, the brokers are getting a little religion here.
32:31They're saying, why should I distribute your funds unless you pay me to?
32:34You get these big management fees, I want some of it.
32:37You're getting plenty, give me some.
32:43The problem is that these fees are not paid by the fund company.
32:47The bill is passed to you and me.
32:51Here it is buried deep in my 401 plan documents.
32:55It took me about an hour to find the reference.
33:02Do you think the industry could do a better job of making people aware
33:05of the effect of fees on their savings?
33:08I think we could make people aware of the effect of every pressure
33:14that they have on their accounts.
33:16What stands in the way of doing that better job?
33:19What I would tell you is, sometimes it's very difficult to get people to focus on something
33:31that seems complicated and dull and boring.
33:35So could we do a better job with helping consumers understand all the things that are tied to what they just bought,
33:42whether it's financial services or the riding lawnmower?
33:45Yes. It's too complicated.
33:48Ah, retirement. Sit back, relax, pull out the paper, and what?
33:52An article that says a typical family pays $155,000 in Wall Street fees on their 401Ks?
33:58Seriously? Seriously, you don't believe it? Search it.
34:00The average American household will pay nearly $155,000 over the course of a lifetime in fees alone.
34:06That's according to a new study.
34:08Here to break it all down, Robert Hiltonsmith...
34:10In the spring of 2012, Robert Hiltonsmith came out with his study on the impact of fees on retirement savings.
34:17When we looked at it, we really found that all of the costs of retirement
34:20are really being shifted onto individuals here.
34:22I was amazed. I mean, everybody covered it.
34:24All the major outlets and all of the financial industry outlets as well, every one of them.
34:28Really have been sold to us, these 401Ks and IRAs, as safe products over the years.
34:32The point is that this system isn't built for individuals at all.
34:36It's certainly not built for their benefit.
34:38New and eye-opening report out this morning.
34:40Fees are taking a huge chunk out of our retirement.
34:43The industry took issue with some of Hiltonsmith's numbers, but he'd made his point.
34:47We're being charged a lot by these financial firms to do not a lot in a lot of cases.
34:52We need something different out there. We need something simpler, something safer.
34:56You know, honestly, something that people can put their money in, get good returns,
35:00not have to worry about losing their entire nest egg,
35:03and then trust that they'll actually be able to retire one day
35:07if they, you know, do the right thing and save enough, etc.
35:14There is someone who has been promoting something simpler.
35:17I was criticized many years ago.
35:19Somebody said, the only thing that poor guy has going for him
35:22is the uncanny ability to recognize the obvious.
35:26For the past four decades, Jack Bogle has been preaching the gospel
35:31of long-term, low-cost investing through index funds.
35:35Get Wall Street out of the equation. Get trading out of the equation.
35:39Get management fees out of the equation.
35:41You own American business, and you hold it forever.
35:44That's what indexing is.
35:46Own a fund that owns the entire U.S. stock market, does no trading,
35:50has a cost of 1% a year to own, and that is the only way to do it.
35:55Then you are the creature of the market and not of the casino.
36:00Index funds buy and hold a broadly diversified basket of stocks
36:04that match the holdings of a market index.
36:07The S&P 500, the Wilshire 5000, or maybe a bond or commodity index.
36:13They don't eliminate market risk.
36:15They ride the market up and down, but they are much cheaper
36:18because there is no active manager.
36:21You can guarantee to the shareholder that they will capture their fair share
36:25of the stock market's return for better or for worse.
36:29If you want to gamble with your retirement money,
36:32all I can say is be my guest.
36:34But be aware of the mathematical reality
36:37that maybe you have a 1% chance of beating the market over time.
36:40It has been proven right year after year after year
36:45because it can't be proven wrong.
36:48It's a mathematical certainty, a tautology, if you will.
36:52Jack Bogle would say, stop fooling yourself.
36:55You're better off investing in a broadly diversified index fund
37:00than in actively managed mutual funds.
37:03What do you say to that?
37:04I think he's a... I'm not going to second-guess him.
37:09I'm going to say that I think that there's a role
37:11for actively managed product in the marketplace.
37:15But that is second-guessing him.
37:17He's saying...
37:18So I'm second-guessing Jack Bogle.
37:20I'm respectfully disagreeing.
37:23I think there's a role for active management in portfolios.
37:28That's my belief.
37:32But what is that role?
37:33How well do they perform?
37:35They come with names intended to reassure every investor.
37:39Growth funds, value funds, balanced funds.
37:42And they are run by seasoned professionals
37:44who are paid handsomely to manage them.
37:47The question is, what are you getting for that?
37:49Are you getting superior performance?
37:52And the answer unequivocally for the industry as a whole is no.
37:59No!
38:00There's no scientific evidence that mutual funds
38:06outperform a simple strategy of holding the market index.
38:12The verdict is in.
38:14It's been in for at least a quarter century.
38:17All else being equal, you should buy the cheaper fund.
38:20And one of the ultimate dirty secrets of the fund industry
38:25is that a lot of people who run other fund companies
38:30own index funds in their own accounts
38:36and don't talk about it unless you put a couple beers in them.
38:42The evidence is overwhelming.
38:48Year after year, actively managed mutual funds
38:51fail to beat index funds.
38:53Studies have borne this out repeatedly over various time periods
38:57in bull and bear markets.
39:01I asked the head of retirement at Prudential,
39:03which markets dozens of actively managed funds,
39:06what she thought about this.
39:08Yeah, I haven't seen any research that substantiates that.
39:12I mean, I don't know whether it's true or not.
39:15I honestly have not seen any research that substantiates that.
39:19So all the research that's done at Vanguard
39:22that makes that argument, you've looked at that?
39:25No, I haven't. I haven't read everything.
39:27But so much it depends on, you know,
39:30what I need is different than what you need,
39:31and there's not an asset allocation or a fund strategy
39:35that's right for everybody.
39:38I talked to one woman at Prudential,
39:41who's head of retirement,
39:42and asked her if she was aware of the studies
39:44that showed that index funds did better over time
39:47than the actively managed funds,
39:48and she says she wasn't.
39:50That's unbelievable.
39:52I find that actually unbelievable.
39:54These people that are in the business
39:56know that the index funds do better, right?
39:58They convince themselves that's not true.
40:01When I've talked to these people...
40:02But wait a minute. All the studies...
40:03How can they convince themselves that's not true?
40:05Because they're convinced they're recommending the fund
40:07that's going to do better.
40:08This is not a time when you want to be buying index funds...
40:10And of course there are hot funds.
40:12This is not gambling. It's investing.
40:15The financial media loves them.
40:18The best performing U.S. stock mutual fund this year.
40:22And we're often susceptible to the lure.
40:25The problem is, as the small print says,
40:28past performance doesn't guarantee future results.
40:32Well, if only the past were prologue,
40:35it would be a great thing.
40:36Returns do not persist.
40:38There are some funds that are outperforming
40:40the broader market.
40:41The good markets turn to bad markets.
40:43Bad markets turn to good markets.
40:45So the system is almost rigged against human psychology
40:49that says if something has done well in the past,
40:52it will do well in the future.
40:54That is not true.
40:55That is categorically false.
40:57The high likelihood is when you get to somebody at its peak,
41:02he's about to go down to the valley.
41:05The last shall be first and the first shall be last.
41:10Last year's dogs could actually be this year's winners.
41:17So why aren't more of us invested in a diversified portfolio
41:21of low-cost index funds?
41:24Critics say it's because the fund industry spends millions
41:27hoping workers will follow their financial advice.
41:31They're hoping that the worried worker will actually trust an advisor.
41:38You have the audacity to believe your financial advisor
41:41should focus on your long-term goals, not their short-term...
41:44In its marketing, the industry implies that retirement advisors
41:47are on our side.
41:49But when it comes to employee retirement plans,
41:52there are no clear standards on who can give advice.
41:56Financial advisors lead from a new position of strength...
41:58The Department of Labor is responsible
42:00for regulating employee retirement plans.
42:03We have a system today where anybody can hold themselves out as an expert.
42:09They call themselves retirement planners, financial planners, advisors, etc.
42:15We don't have a standard way that the consumer can figure out
42:19who has the expertise to provide advice.
42:23What's a financial advisor?
42:24That is a term that means almost nothing.
42:27It is somebody who might be a financial planner,
42:30or it could be a broker who is really a salesperson.
42:33There when you need them.
42:35There are registered investment advisors, or fiduciaries,
42:38who are obligated by law to act in their clients' best interests.
42:42Let's talk about the cookie-cutter retirement advice you get at some places.
42:45But the vast majority of so-called advisors, around 85%, are not fiduciaries.
42:50Selling their funds makes them more money, which makes you wonder, isn't that a conflict?
42:53They are merely brokers or salesmen.
42:56Yikes!
42:57A fiduciary is a professional who, by law,
43:00is supposed to put your interests ahead of their own.
43:05Broker-dealers are not under that obligation.
43:09They have to conform to a suitability standard, which means they can't put you into something which is totally unsuitable for you.
43:21This doesn't have to be the best thing that you could pick out for them.
43:25It's just something that's suitable. It's okay.
43:28I can't believe that somebody would want to get into a business and then stay in the business of merely being suitable.
43:35Basically, your guy is out for himself to maximize his sales,
43:40and the way he does it is to be loyal to the mutual fund.
43:43And they try to sell you the most profitable products.
43:47Steve Shulow learned this lesson the hard way when he encountered someone selling financial advice in his school lunchroom.
43:56I met my salesperson in the teacher's cafeteria.
44:03She showed us the different products.
44:06You know, I didn't know very much about investing, but in the back of my mind, way back then,
44:13how is this person compensated?
44:16It was always a question, because I had worked in the private sector before I came into teaching,
44:21and I knew there were no free lunches. Nothing is free.
44:25The salesperson working on a commission basis offered Shulow an annuity,
44:30a retirement insurance product with what he thought was a guaranteed return of 12% a year.
44:36So I signed up for $200 a month, and for about five years, the interest rate was going way down to 3%.
44:45And I was wondering, what the heck is going on here? Why is it down to 3%?
44:49I didn't understand that the insurance company has the right every year to reset that rate as AC fit.
44:56So how can you know when a financial advisor is really a salesman?
45:02If you're working with somebody who is trying to sell you financial advice, you say to them,
45:07are you acting in my best interest here? Would you be willing to sign a pledge that says
45:12that you're going to act as my fiduciary at all times with all products?
45:17Because if you're not, then I'm going to leave. And it's really just as simple as that.
45:21Another broker sold an annuity to the Featherstens after the crash of 2008.
45:28At the time, it seemed suitable.
45:30This was a product that we had discussed with him,
45:33and we thought that this would insulate some of our money from what we had just gone through,
45:38what most a lot of people had just gone through.
45:40Right. You know, we trusted him.
45:42Yeah, we trust him.
45:43Yeah, we trust him.
45:44But the problems came after Mark got laid off and the couple had to break into their account.
45:50I mean, we're talking on $7,000, the fees have been upwards of $600 just to get the money out.
45:58I can agree paying the 10% penalty, you know, to Uncle Sam.
46:04But, you know, these companies need to realize that they're making money off the backs of people
46:09that have worked hard for their money.
46:11It makes you mad, but, you know, what are you going to do?
46:14You're powerless.
46:16He paid for advice that was not appropriate.
46:19To try and hold the industry accountable, the Department of Labor proposed a new fiduciary rule in the fall of 2010.
46:26When retirement savings are at stake, advisors should put their clients' interests first.
46:31The critical question is what constitutes paid investment advice.
46:36The proposal we're discussing today will amend a 35-year-old regulatory interpretation...
46:41The rule would require all financial advisors to put their customers' interests before their own
46:46whenever dealing with retirement accounts.
46:48Today, there are trillions of dollars in each of these markets.
46:52The variety and complexity of financial products have increased and made fee arrangements far less transparent.
46:58The financial services industry lobbied hard against the new rule.
47:03It just seems that the financial services industry is really concerned about...
47:08They got the attention of Congress.
47:10Our job here in Congress is not to preserve the business model that has existed for 35 years.
47:16But, if you're going to upset that business model, we better know why and we better know where we're...
47:22We don't need an alternative. We just don't need to do this.
47:26The Labor Department pulled back their proposal.
47:33People in the suitability business have very good lobbyists,
47:37and they've done a very effective job of creating doubt in Washington
47:41and concern about how something like this would be administered,
47:45about how the fiduciary standard would be enforced,
47:48about the costs of making whatever transition you would need to make.
47:53The full political power of the financial institutions and the mutual fund industry
47:57was completely engaged in making sure that that rule never saw the light of day.
48:02They were saying the rule is too tough.
48:05They were saying they don't want any rule.
48:07They don't want to have fiduciary applied to them.
48:10They don't want to be...
48:11Because they're not really dispensing financial advice.
48:13They're just dispensing information and educational services, yada, yada, yada.
48:18Give me a break.
48:19They're steering you to the funds controlled by their company.
48:24Otherwise, you might leave and go somewhere else.
48:28I asked the head of retirement at J.P. Morgan Asset Management
48:32why anyone would want to take advice from someone not bound by a fiduciary pledge.
48:38Shouldn't I want to only work with somebody who has a fiduciary obligation?
48:43Not necessarily.
48:45No?
48:46No.
48:47Isn't it better?
48:48It's different.
48:49It's not better?
48:51It can cost more.
48:53You may not get any different advice or outcome, and it can cost you more.
49:00Right, but make this simple for the investor.
49:02I sit down with somebody, and they give me some advice.
49:06You say I should ask a lot of questions.
49:08I want to know whether or not one of those questions shouldn't be whether they have a fiduciary responsibility.
49:13Yes, I think that's a very good question.
49:15And if they don't?
49:17Ask them what that means and see what you think about their answer.
49:21Well, make it simple.
49:22Should I prefer somebody with a fiduciary responsibility?
49:25So that's a question that can only be answered on a personal basis based on what your level of need is, what your risk appetite is, and how much of the investment decision you want to delegate.
49:38But this isn't making it simple.
49:40Well, I wish it was simpler.
49:43Over the past couple of decades, we've handed over more than $10 trillion of our retirement money to the financial services industry.
50:01They've built a pretty good business out of it.
50:04But how well is it working for you and me?
50:08So far, most efforts to reform the industry have fallen flat.
50:12Recently, the government has forced through some new rules on fee disclosure, and the Department of Labor says it will try to reintroduce a new fiduciary rule soon.
50:23Unless there's a game changer, unless there's a law passed or laws passed or scrap the system and start over, as I advocate oftentimes, no, nothing will change.
50:35There's no incentive for the market to change.
50:38People will just keep on saving because it's the only option they've got, and companies will keep on raking in the profits.
50:47So saving for retirement remains a bewildering and frightening challenge for millions of Americans.
50:53For the people we met in making this program, the outcomes are mixed.
51:00Some are confident.
51:02I definitely couldn't retire right now.
51:04But the fact that I'm planning ahead and, you know, investing wisely is hopefully, you know, going to help, and I don't think I'll run out of money.
51:15I am concerned about running out of money, but I'm a survivor, and if I have to downsize into a tent, I will.
51:23Do something special.
51:24Retirement dream, I mean, we're living it right now.
51:29This is it.
51:30This is it.
51:31You know, life gives you these opportunities.
51:34We never planned to learn about investments until we got slammed in the gut.
51:39Then, oh, we better start paying attention here.
51:42Others are worried.
51:44I'm leery.
51:45I'm really, really leery.
51:47I don't know what I'm going to do.
51:49I feel like I'll be working for the rest of my life.
51:54Absolutely for the rest of my life.
51:57It's hard to imagine, even at this point in my life, being retired.
52:03Yeah.
52:04I just don't see it.
52:05I just don't see it either.
52:06I don't see it.
52:09My retirement plan is fingers crossed and pray, basically.
52:14Yeah.
52:15Win the lottery.
52:16Hope my dad has more money than he does.
52:19And the truth is, you're just going to have to find a way to save way more than you should
52:24have to.
52:27Meanwhile, what about Hilton Smith's research?
52:30He is now finishing his PhD dissertation on America's retirement crisis, but the grant money
52:37he needs to support his continuing work has dried up.
52:46As for me, over the last several months, I've spent a lot of time playing with different
52:51online retirement calculators.
52:54Some more optimistic, others very discouraging.
53:00I will keep working.
53:02Next time on Frontline.
53:11She said, I'm breaking up with him tonight.
53:14A 911 call from an off-duty officer.
53:17My girlfriend shot herself.
53:18Was it a suicide?
53:19I saw him be rough with her in my house.
53:21Or a homicide?
53:22There was not sufficient evidence that crime had been committed.
53:25Frontline and the New York Times investigate how the police handled a case with one of their own.
53:30He was never treated like a suspect.
53:32He was treated like a brother.
53:33A death in St. Augustine.
53:40Go to pbs.org slash frontline for a closer look at what the fees in your 401k plan are actually costing you.
53:47This is where fees would really hurt you badly.
53:49Questions to ask about funding a balanced retirement plan.
53:53Martin Smith's extended interviews with Jack Bogle.
53:56Look at the impact over an investment lifetime.
53:58And Helene Olin.
53:59Maybe a retirement mess is a better word for it.
54:01And connect to the Frontline community.
54:03Sign up for our newsletter and follow us on Facebook and Twitter or pbs.org slash frontline.
54:10Frontline is made possible by contributions to your PBS station from viewers like you.
54:21And by the Corporation for Public Broadcasting.
54:24Major support for Frontline is provided by the John D. and Catherine T. MacArthur Foundation,
54:29committed to building a more just, verdant, and peaceful world.
54:33More information is available at MacFound.org.
54:36Additional support is provided by the Park Foundation,
54:39dedicated to heightening public awareness of critical issues.
54:43The Ford Foundation, working with visionaries on the frontlines of social change worldwide,
54:48at FordFoundation.org.
54:51The Wincoat Foundation.
54:53And by the Frontline Journalism Fund, with major support from John and Joanne Hagler.
54:59For more on this and other Frontline programs, visit our website at pbs.org slash frontline.
55:29Frontline's The Retirement Gamble is available on DVD.
55:38To order, visit shoppbs.org or call 1-800-PLAY-PBS.
55:44Frontline is also available for download on iTunes.
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