by Eve Kaplan, CFP(R) Practitioner
Have you seen the PBS Frontline documentary “The Retirement Gamble”? PBS ran it again on October 29 on Channel 13 — just in time for Halloween. It’s hard to watch this program without a sense of horror at the way our retirement plan system is rigged to rip off Americans struggling to save for their retirement. Click here for the website link.
Here are the key points in “The Retirement Gamble” – and look at some things you can do to shore up your retirement plan:
- The majority of Americans close to (or in) retirement don’t have enough saved to cover a lengthy retirement…and they don’t have any ideas about improving their situation.
- The program focuses on retirement systems (401(k) and 403(b) plans) that bilk billions of dollars out of Americans in the form of fees. Some of these fees deliberately are hidden in fine print.
- US government attempts to clamp down on runaway retirement plan fees have met with mixed reaction in Congress, thanks to successful lobbying efforts by the brokerage industry (JP Morgan Chase, Prudential, etc).
- Americans are confused about the critical difference between a Fiduciary advisor and a non-Fiduciary retirement advisor. The former (e.g. fee-only Registered Investment Advisors) are required to put clients’ interests before their own interests. Brokers, however, adhere to a lower “suitability” standard — as long as a product seems “suitable,” the broker has done his/her work and presumably sleeps well at night (better than the retirement plan participant).
- Many retirement plan participants get hammered by periodic market swoons and fees if they ignore how they are invested. A retired couple (2 teachers) was interviewed about the excessive concentration of their retirement money in dot.com stocks; their account plunged more than 2/3 in 2000. Teachers are sold “tax-sheltered annuities” by agents who circulate in teacher’s lounges – not knowing they are being handcuffed to punitive redemption penalties, misleading return projections and high fees.
- John Bogle (Vanguard Investments founder) pointed out that a “little” 2% annual fee will erode a whopping 63% of what clients could have had in their retirement accounts with a 7% annual return (pre-fees). In other words, “the tyranny of compounding costs” whittles the $100,000 you should have down to a measly $37,000 over a 50 year investment period.” JP Morgan Chase and other brokers who run expensive retirement plans come across poorly when they responded to this by saying they weren’t familiar with these numbers, each retirement client has different needs, etc.
- Sadly, there don’t seem to be enough improvements to retirement plans to avoid having Americans work well into their 70s (if they can) or run out of money in retirement.
So what can you do? Here are some strategies:
- Utilize tools such as www.brightscope.com to verify the quality (including cost) of your plan. If your plan is rated poorly, consider only saving up to a company match.
- If you qualify (based upon your adjusted gross income) save additionally in an IRA – look for low-cost mutual funds (e.g. Vanguard) so you can save 1-2% per year in fees.
- Consider opting out of your plan if you have no match – you lose the up-front tax-deduction but you may end up with more in hand by investing in low-cost mutual funds with after-tax money. Run these numbers with a professional since your retirement horizon and tax bracket can affect outcomes.
- Rollover old 401(k) or 403(b) plans to eliminate ongoing plan fees. Only consider retaining old plans if you have an exceptional deal — e.g. 3% or higher guaranteed interest in the current low interest-rate environment.
- Postpone social security as long as possible – seek professional help before making social security decisions.
- Consider “downsizing” by moving to a less expensive part of the country if you are at risk of outliving your assets. Sadly, New Jersey has the dubious honor of being a relatively unattractive state for retirees due to high taxes (including state estate tax) and high living expenses. New York may not be much better.
- Save, save and save some more!
- Get professional advice about your retirement strategy from someone who has a fiduciary responsibility to put your interests before his/her own.
(C) Copyright by Eve L. Kaplan, 2013. All rights reserved.