PBS FrontLine Special: "The Retirement Gamble"

Timothy Brown |
many people don't understand why they need a fiduciary advisor.

Managing a 401(k) is too complex for many people.

If you didn't see the PBS Frontline program "The Retirement Gamble," it is embedded on this blog post below. It is a wakeup call to everyone who wants to retire with dignity. I have summarized the key points below.

The numbers are not good for many people. One-third of Americans have not saved anything for retirement. Many have some savings, but not nearly enough for retirement.

The question this PBS special tried to answer is, "How did we get here, and has it always been this way?"

The short answer is, "no." We haven't always been here, and times have changed, for the worse. Frontline went on to identify the foundational issues that have caused the destruction of people's retirement savings.

Pension Plans

In the past, people worked at a company for their entire career. Then, they retired with a company-provided pension that would pay them for the rest of their lives. Times have changed.

Now, very few companies offer pensions. Instead, many provide employees with a 401(k) plan.

Why the change? Companies found that pension plans were too expensive to maintain. One big reason pensions were so costly was that employees were living longer. With the advent of the 401(k), companies saw a way to get out of the responsibility of providing pensions and reduce costs. By changing to a 401(k), they were able to transfer all the risk of retirement saving to the employee.

For most employees, however, managing their own 401(k) plan and retirement savings has been too complex. The choices are bewildering and many don't know what to do.

"You put up 100% of the capital, you take 100% of the risk, and get only 30% of the return." –John Bogle [Tweet This]

Are 401(k) Investors Getting Good Rates of Return on Their Investments?

What about those people who did put money in their 401(k)? They are OK, right?

According to "The Retirement Gamble," no, they are not all right. Employees didn't know how much to save, as no one was helping them get those answers. In addition, many who did save to their 401(k) plan are only now realizing that their investments didn't earn a good rate of return.

Why Don't Employees Earn a Good Rate of Return on Their 401(k) Dollars?

Frontline shined an unflattering light on the retirement industry and mutual fund companies. What they found was:

  • The highly lucrative financial services industry has lined its pockets at the expense of employees.
  • Fees in 401(k) plans are hidden and almost impossible to understand.
  • Many of the 401(k) plans offered to employees are riddled with expensive investment options and other hidden fees, ranging from 2% per year to upwards of 5% per year.
  • To reinforce the point of just how erosive these fees are, Vanguard founder John Bogle produced a calculation showing that over a working lifetime of 50 years, a 2% fee levied on a 7% return results in a 61% cut to the final ending value.

Per Bogle, "You put up 100% of the capital, you take 100% of the risk, and get only 30% of the return."

Are Investors Getting Objective Advice?

Watch The Retirement Gamble on PBS. See more from FRONTLINE.

Frontline went on to highlight that people need objective advice on their retirement savings that is in their best interest, not their broker's.

Unfortunately, Frontline found that objective advice is very difficult to find. The program recommended that you work with and advisor that is a fiduciary. They highlighted that Registered Investment Advisors are fiduciaries by law. Brokers are not fiduciaries, they are financial salesman. Frontline also reported that the vast majority of financial advisors—about 85%—are brokers, not fiduciaries. It is important to ask any advisor you work with if they are a fiduciary. Will they put your interests first all the time? Then ask if they will put their answer in writing. If they are unwilling to put it in writing, walk away fast.

Anyone can hold themselves out as a financial advisor. There is no criteria. The term means absolutely nothing. They may be a financial advisor, or they may be a "broker" who is really just a salesperson.

The problem is that the brokers follow a less stringent requirement called the "suitability rule." This says that a broker can't put you into a product that is totally unsuitable for you. The suitability standard enables brokers to push very high expense funds and annuities that provides more benefit to the broker, not the investor. Frontline asked the head of retirement at JPMorgan Chase why anyone would take advice from someone who was not bound by the fiduciary standard and would not sign a fiduciary pledge. His rather uncomfortable response: "Not necessarily, its different, it could cost more".
The financial services industry has no incentive to change the system or to make it simple to understand. These firms spend big bucks on advertising to get your retirement dollars. This is a huge industry that is profiting at your expense.

Key Takeaways

  • Work with an advisor who has professional investment management and financial planning credentials.
  • Work with a fiduciary advisor.
  • Work with a fiduciary or a Registered Investment Advisor who is obligated by law to act in their clients' best interests. Have the advisor put it in writing that they follow a fiduciary standard.

Should You Buy "Actively Managed" Mutual Funds?

Frontline questioned a JPMorgan Chase executive if it is appropriate for to invest in higher expense "actively managed" mutual funds when there is a research showing that index funds do better than actively managed funds.

When Frontline confronted the head of retirement planning at JPMorgan Chase, his response was, "I think there is role for actively managed mutual funds and active management in portfolios."

What do you get for an actively managed fund? Should these funds play a role in your portfolio?

The answer is, unequivocally, no. There is no evidence that actively managed funds can beat their respective indices. Year after year, actively managed funds fail to beat index funds. Studies show this is true in bull and bear markets.

Frontline interviewed a Prudential executive who is head of retirement about what she thought about the studies that show index funds beat actively managed funds. (Prudential sells many actively managed mutual funds, so we know he was setting her up). The Prudential executive said, "I haven't seen any studies that substantiate that." She was not aware of any studies that showed that index funds do better than actively managed funds. I imagine she has now been emailed a million different studies that show this.1,2

While there are "hot" funds, returns do not persist. Funds that did well in the past do not do well in the future. A study of 8,755 institutional managers show that, on average, the active managers who beat their benchmarks for three years before being hired then lost to their benchmarks in the following three years. The same study also looked at 660 hiring and firing decisions and concluded that the managers who were fired beat the new hires in the next three-year period.3

One executive just said that investors could do a better job of understanding what they have bought. Who is kidding who? These large financial services firms push "actively managed" mutual funds or annuities, where the commissions and expenses are the highest. This is where they make the most money.

Key Takeaway

  • Avoid actively managed mutual funds and invest in low-cost index and passively managed mutual funds.

Do we think there will be changes to the industry? Not likely. Given that the financial services firms are large advertisers and have very good lobbyists on Capitol Hill, change is doubtful.

If you want to be sure your retirement is sound, call us at 952-303-6715 to schedule a no-cost introductory meeting. We will meet with you and help ensure you are on the right track. Brown Wealth Management is a fee-only firm. We are a Registered Investment Advisory firm and follow a fiduciary standard. We put this in writing for all of our clients.


  1. http://www.rhsmith.umd.edu/faculty/rwermers/FDR_published.pdf
  2. http://faculty.chicagobooth.edu/john.cochrane/teaching/35150_advanced_investments/Luck%20versus%20Skilll%20in%20the%20Cross%20Section%20of%20Mutual%20Fund%20Returns.pdf
  3. Amit Goyal and Sunil Wahal, "The Selection and Termination of Investment Management Firms by Plan Sponsors," The Journal of Finance, vol . 63, no . 4 (2008).