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Rekenthaler Report

To the Back of the Line, Frontline

Rekenthaler drop-kicks PBS' documentary.

Overstate Much?
Nobody loves 401(k) plans these days. Once the media's darling, 401(k)s have come under increasing scrutiny and criticism, culminating in April's widely viewed PBS "Frontline" documentary, "The Retirement Gamble," which savaged 401(k)s for their role in the country's "retirement crisis."

I'm not sold. Yes, 401(k) plans are imperfect. (So, too, were Mother Teresa and sliced bread.) They are too expensive for small companies. They often fail to reach younger and/or lower-income workers. They may contain unpalatable funds. Historically, many employees have not understood how to use 401(k) plans and have not used them particularly well. Those are legitimate criticisms.

"The Retirement Gamble," however, goes well past legitimate. To make its points, the show misrepresents the typical investor experience. It emphasizes the worst aspects of 401(k) investing, so that the bottom 5% or 10% of the distribution appears to be the norm. Periodically, it intersperses a frightening statistic that, upon closer examination, isn't really that scary after all. The purpose of the statistic was to scare, not to inform.

In short--and quite ironically--the show resembles a Wall Street seminar. It seeks to upset the audience through the use of dubious figures and disturbing anecdotes. It all feels quite convincing at the time, but after the fact, parsing through the statements, you realize that it was a sales presentation--and you were had. 

Let's look at some of the claims:

1) "Let's begin with one simple fact. America is facing a retirement crisis."

The rhetorical device is the same made by George Orwell in his famous essay, "Politics and the English Language," which begins, "Most people who bother with the matter at all would admit that the English language is in a bad way ..." Twenty words into his essay, Orwell has inserted the large and unsubstantiated claim that the English language in 1946 was in a "bad way." That is, it was in worse shape than in previous years. If you accept that claim, the rest of his argument flows. 

So, too, with "The Retirement Gamble" and its "simple fact"--another huge claim that can't be proved. Think about it. Was the English language in 1946 truly worse than in 1896? High unlikely. Now, it's quite useful to suspend disbelief and permit Orwell his marvelous attacks on mealy mouthed writing, but the thesis cannot stand. Nor is it credible that now, and only now, the United States faces an unprecedented retirement crisis. Why 2013 instead of 1993 or 1973? Mainstream America has never retired in comfort. It has always cobbled together meager savings, Social Security and/or a modest pension payment, and a reduced lifestyle. That is what retirement has always meant for the middle class, as opposed to the wealthy. Today is not different. 

Finally, the language is much too familiar. Yep, this is Wall Street seminar #101: Present the matter as a "crisis" to scare the audience into action. 

2) "Half of all Americans say they can't afford to save for retirement."

When did more than half of all Americans feel they could save for anything? How does this apply only to now, and only to 401(k)s? I'm all for a documentary exploring why the Chinese, with far lower levels of income, have personal savings rates of 50% and why Americans believe that they never have enough money at hand. But that topic has absolutely zero to do with 401(k)s. 

3) "The average retirement fund has lost $12,000."

I don't know what this means. Presumably, this is some peak-to-current measurement of 401(k) balances going back to the peak prior to the 2008 market collapse. But even that doesn't fully make sense. U.S. stocks, bonds, and cash have all risen in value over the past five years, and Vanguard recently released data showing that its median 401(k) investor made 12% cumulatively from 2008-12. Those figures don't include new cash investments, either, which most 401(k) investors make. 

So, I rate this statement as: 1) without meaning, and 2) made with the intent to damage.

4) "One third have next to no retirement savings at all."

Given that one third of Americans are under the age of 25, it would be a shock if they did have retirement savings. The producers probably didn't mean one third of all Americans. They meant one third of a subset. I have no idea what subset. Once again, a statement without meaning, made with the intent to damage.

5) "They showed you the plan. You either had your choices between an aggressive investment, moderate, or conservative. You know, there was nobody there managing my money. It was all up to me."

Not so. If the choices were packaged into three neat bundles, sorted by risk, there was a whole lot of work being put into managing that money. The task was far from being "all up to" the speaker. 

However, I do understand that investor's concern--many if not most employees want nothing to do with investment choices. But you know, that's exactly where the industry is heading, with automated enrollment into default options and target-date funds that require nothing more than the participant's age. You'd think with all those experts interviewed for the documentary that somebody would have mentioned that the biggest trend in the 401(k) industry, by far, has been to remove investment responsibility from the employee.

6) "Should we invest all of our 401(k) in Enron stock? Absolutely. Don't you guys agree?" [Laughter]

Another rhetorical warning sign--a documentary made in 2013 reaching back to 2001 for its warning about company stock. The reality: Over the years, very few 401(k) owners have held most of their assets in the stock of companies that have gone bankrupt. It's a great horror story, and surely a terrible event for those who experienced it, but it's as representative of the typical 401(k) experience as squalor-filled ships being towed into port are of cruise-ship travel.

Once again, it's a hard sell. If this show were a financial advisor, I'd walk out of the seminar.

7) "The average actively managed mutual fund carries an annual expense of 1.3 percent. Some funds charge a fee of 2 percent, and even as high as 5 percent."

Fidelity, T. Rowe Price, and Vanguard have half the industry's market share, and the assets in their 401(k) funds are in funds averaging 60, maybe 70 basis points. I haven't assembled the data--maybe nobody has--but there's no possible way that the average 401(k) assets are in funds with 1.3% expense ratios. As for 2% and that "even as high as 5 percent" quote? Yep, it's the scare tactic once again.

Look, there are good points made in the documentary, particularly about the importance of costs and the compounding effect of fees over time. And there are certainly some good sources, such as Jack Bogle and The Wall Street Journal's Jason Zweig. However, the criticisms are not put into context. Yes, costs can be too high and investing too hard. Guess what? Vanguard is increasing market share. Fidelity has been forced to offer index-based target-date funds. Automated-enrollment plans and default programs are mushrooming. Target-date funds are booming. These themes are all part of the current 401(k) climate--but not part of the show. 

Well, enough. I've pleased the fund industry and annoyed most of my readers--the opposite of what I generally hope to accomplish. But I can't bite my lip on this topic.

John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.