Can Consumers Be Smart Retirement Savers?
Consumers need to learn to unbundle and go direct
Unbundle – To charge separately for services in lieu of one fee for a package of services. Most RIA fiduciaries/advisors, intermediary product sales force, charge an annual fee to select and monitor investments, in addition to “coaching”, goal setting and budgeting, planning and social security strategies. Consumers must separate “investment management” expenses from non-discretionary services. Consumers must evaluate investment management expertise, distinct from “other” services.
Go Direct- In lieu of paying an intermediary an annual fee (assets under management;) invest directly in an SEC registered investment company (mutual fund) rather than through a broker-dealer, thereby saving the second assets under management fee, omnibus accounting fees, and associated cyber-security risks. Going direct presents immediately improved performance, through intermediary distribution fee savings.
Skeptics say the system is too complex and financial advisors, robos and planners – and their costs – are required for today’s retirement saver. On the other hand, simple steps can save the American worker a lot of money.
The Wall Street Journal, April 12, 2017, asked, “Can Consumers Be Smart Health Care Shoppers”
While there are many differences between health-care and financial services one commonality is the American consumer has no choice but to be actively engaged in both. Study after study has cited rising deductibles and co-pays in health-care and the growth of defined contribution retirement savings – 401(k)’s with and without an employer match – as the new reality. What were once seen as assumed “benefits” to attract and retain workers in the 1980’s now require significant employee financial contributions.
Workers are told they need to take greater control over their retirement savings; but are laypeople capable of sifting through all their choices to make the right decision?
YES: There Are Simple Steps That Can Significantly Improve Performance
First, “Conventional wisdom holds that it is impossible to compare prices for medical care as consumers do in other markets. But it’s not only possible, it’s easier than most of the naysayers realize.”
Comparing performance, fees and other pertinent issues in retirement saving is even more straightforward – just check the Ticker. To sell securities in the United States to the general public a company must file audited performance with the Securities and Exchange Commission (SEC) and receive a “Ticker,” an arrangement of characters (usually letters) representing a particular security listed on an exchange or otherwise traded publicly.
Using publicly available tools and uniform data provided to the SEC, consumers for retirement savings can quickly and meaningfully compare potential investments, when offered an appropriate independent curriculum.
However if an intermediary broker/planner or RIA intermediary advisor creates a portfolio of “Ticker” delineated securities the resultant portfolio has no Ticker and the subsequent “portfolio”, in most cases, does not belong in most American’s retirement savings.
Second, turning back to health-care, “For the critics, the argument comes down to one thing: There’s a lot of information out there, and it can be confusing for laypeople to sort out what kind of care is appropriate and how they can get the best deal on it.”
Similar to health-care there are many choices for retirement savers to consider. However, almost without exception the retirement saver is interested in total return, year after year; after all fees and expenses. Core retirement investment choices are finite making valid comparisons possible. Skeptics may argue, “Past performance is not indicative of future performance;” however using publicly available data, retirement savers have an independent starting-point to evaluate any recommendation from a friend, article or financial advisor.
Third, “Critics argue that the public doesn’t seem to want to shop for health care. People want to get quality care and be confident about their choices, so they would rather make a choice based on personal recommendation, not price.
What’s more, these naysayers argue, patients lack a sufficient incentive to shop for care, because how much they save depends on how their benefit plans and deductibles are set up.”
Consumers may not want to shop for retirement savings; but the cost of not acting like a “consumer” is too high. Most consumers do not enjoy buying gasoline for a car; but can you imagine purchasing gasoline and not knowing what is the price per gallon and simply giving the gas station, or someone, $40.00 without knowing how many gallons and what grade of gasoline you purchased? Unfortunately this is how too many people are saving for retirement today.
Analysis by the President’s Council of Economic Advisers in 2015 showed that:
Working and middle class families receiving conflicted advice earn returns roughly 1 percentage point lower each year (for example, conflicted advice reduces what would be a 6 percent annual return to a 5 percent return).
A typical worker who receives conflicted advice when rolling over a 401(k) balance to an IRA at age 45 will lose an estimated 17 percent from her account by age 65. In other words, if a worker has $100,000 in retirement savings at age 45, without conflicted advice it would grow to an estimated $216,000 by age 65 adjusted for inflation, but if she receives conflicted advice it would grow to $179,000—a loss of $37,000 or 17 percent.
Using a broker-dealer platform for retirement product distribution presents further unknown costs, still lacking full transparency as to omnibus accounting fees and distribution redundancy, given today’s technology, as highlighted recently, “How to Find Out What Your Broker is Charging You?” at MarketWatch.
Finally, “Acting like a prudent health-care consumer is not that hard. And consumerism spurs providers to act more like competitors.”
Turning to retirement savings – Acting like a prudent consumer for retirement savings products is not that hard, when one is provided analytical tools and step-by-step practice using these tools. And consumerism spurs mutual fund companies to act more like competitors. Why is it that there are almost 10,000 mutual funds and over 80% of these funds underperform the market? Can you name another industry with so many poorly performing products?
NO: The System Is Too Complex for People to Make Useful Choices
Arguing the other side of the issue, “Advocates for price transparency would have us believe that we, as “consumers,” should consider our health care a product to be shopped for, like a pair of shoes. But mainly we are “patients,” with varied, often time-sensitive health-care needs. There is an important distinction between presenting the information—and choices—to patients and asking consumers to make complicated decisions about their health care based on that information.”
Here the distinction between health–care and retirement savings diverges. Questions of complexity and time-sensitivity of acute care may be present in health-care but not in retirement savings. A disproportionate amount of the expense of health-care is in the last months, and weeks of life, or the result of acute care/ trauma needs – sudden life threatening conditions. In comparison, access to a 401(k), 403(b) or IRA is available nationwide and retirement saving is much more predictable and can be planned for more effectively – in fact, with the power of compounding the value of saving “earlier” have a greater pay-off due to compounding.
The complexity of retirement savings is a direct result of the financial services industry bundling investment management with every other financial decision a consumer makes, combined with a confusing array of labels for their sales force. “Combine all of your accounts in one place,” “Our “advisors” will show you how to save more each month,” “and how to incorporate your Social Security with your savings,” and the list of pitches on television, the internet and magazines goes on and on.
When you need advice, pay an accountant or lawyer an hourly fee. Go direct to a professional money manager, who files audited returns at the Securities and Exchange Commission (SEC) and provides full transparency as to holdings and performance after all costs, including portfolio turnover.
Retirement savers can and should unbundle investment management from their saving, budgeting and planning.
Looking again at health-care, “People also lack a sufficient incentive to engage in price shopping. A single, well-informed and motivated consumer who needs an expensive elective procedure may be able to spend time researching and save money by shopping for the lowest price possible, but this scenario is the exception rather than the norm.”
In comparison, a retirement saver will see almost thirty-percent more at retirement if they invest their retirement savings directly with a Ticker delineated mutual fund rather than through an intermediary. Fees, including intermediary fees, impact the size of one’s nest egg, as reported by Demos in The Hidden and Excessive Costs in Retirement Savings.
Finally, “Smart shopping might work for some people. But for the vast majority of health-care consumers, it isn’t even a choice.”
Smart shopping will help all retirement savers – 401(k), 403(b) or IRA – when practical independent training in the basic tools to understand mutual fund performance, passive or active, fees, portfolio turnover costs and holdings, is a choice for retirement savers.
Smart shopping requires the consumer understand the significant difference between a SEC registered investment advisor (RIA) who works for a SEC registered investment company, that files audited performance, and a RIA intermediary, for whom the consumer has no tools to evaluate.
In 1940, Congress passed the Investment Company Act of 1940 to protect the public by requiring material disclosures, including performance and costs derived from portfolio turnover, among other factors in mutual funds. From the impact of hidden fees of ETF’s, to dark pool trading, to computer algorithm managed accounts, to “hedge funds”– all with no SEC audited performance—the consumer, in tandem with their employer, must understand how to evaluate the material data, which can only be accomplished with a Ticker-delineated SEC registered investment company’s mandated SEC disclosures and employer-sponsored tools and training to understand the relevant disclosures.
The prerequisites are not even basic high-school math. It is the will to take charge to end an unhealthy dependency on a conflicted sales force and access to the tools to evaluate the value today of such intermediaries. Since the advent of 401(k)’s the Department of Labor has mandated plan providers – employers – to provide investment selection education for employees. Education must inform and enable employees to make their own choices rather than promote products and services that benefit the broker-dealer industry.
John Bogle, founder of Vanguard, recently remarked, “It doesn’t really matter in the long run whether there’s a fiduciary rule or not. With each passing day shareholders get better educated and they will move their move to people doing things right…”