Helaine Olen Boots 401(k) Plans

Shambolic?
The assault on 401(k) plans continues. This time, it comes from Helaine Olen, the well-reviewed author of Wall Street expose Pound Foolish. Last week in Salon, Olen penned the aggressively titled article "401(k)s are a sham," as part of an even more aggressively titled Salon series called "The Age of Fraud." (Salon is nothing if not shy.)

Olen opens with a misfire, criticizing Money magazine's Tyler Mathisen for saying in 1996, "For retirement, the answer is 4-0-1-k. I feel sure that someday, like a financial Little-Engine-That-Could, it will pull me over the million-dollar mountain all by itself." Olen responds that 401(k)s did "not make us millionaires as self-appointed pundits (irony alert!) like Mathisen promised."  

Us? Mathisen stated that his 401(k) plan would eventually grow to $1 million. It certainly will; indeed, it probably has already.

She then raises two potentially useful points:

1)      "The U.S. is on the verge of a retirement crisis. For the first time in living memory, it seems likely that living standards for those over the age of 65 will begin to decline as compared to those who came before them."

That is powerful. Tell me more. Unfortunately, this claim is given without support, accompanied by the hedge that "it seems likely." As a result, this passage feels like one of those scary but nebulous statements made by the financial-services companies that Olen loathes.

2)      "IF a household where the wage earners are between the ages of 55 and 64 does have a retirement account, [their 401(k) balances] barely hit the six-figure mark at $100,000."        

Workers of that age had access to 401(k)s for only part of their careers. Their balances at retirement are therefore not reliable guides for the sizes of the balances of the generation that follows them. This caveat holds particularly true because the 401(k) plan is rapidly evolving. Automatic enrollment programs into default options, sometimes supplemented by automated increases in 401(k) savings rates, have become the new normal. These changes will surely result in significantly higher ending balances for the younger generation.

That said, it's a sobering figure. The current group of retirees does indeed seem to have fallen betwixt and between.

The good stuff being delivered, Olen follows with several criticisms along the lines of the PBS Frontline documentary, "The Retirement Gamble":

3)      "The financial services industry collects $89 billion in 401(k) fees."

The financial services industry also collects billions per year from defined-benefit pensions. Should pensions be banned? For that matter, Vanguard collects billions per year (about $2.5 billion) in revenues. Perhaps Vanguard, too, should be banned.

4)      "The 401(k) industry serves a captive audience."

This is not so. The employer, not the participant, is the purchaser of 401(k) services, and the plan sponsor has many choices. Ms. Olen tacitly acknowledges this by writing, "While we hope our employers comparison shop when they select a 401(k) retirement plan to offer their employees, that's not a given."

Thus, the concern is not that the 401(k) industry serves a captive audience, but rather that the plan sponsor will make a poor choice on behalf of participants. Once again, such is the case with defined-benefit plans. Is Olen against defined-benefit plans? I suspect not but she seems to be arguing that way.  

5)      "The average expense ratio for target-date funds is 1.08%."

This is technically correct but misleading. The average participant--and this article is about people, after all--pays less. The big funds tend to be relatively cheap and the small funds relatively dear. The asset-weighted average for target-date funds is about 0.75%.

6)     " Legg Mason's Target Retirement Series charges 1.47% per year."

This is Olen's version of a Prudential advertisement. So that I will save more, Prudential tells me I might live to be 110 years old. Which is only slightly less likely than me owning a Legg Mason target-date fund. Among them, Fidelity, Vanguard, and T. Rowe Price have 12,000 times the target-date assets of Legg Mason. 

7)       "Expenses are critical; the difference between 0.50% in annual costs and 1.5% in annual costs reduces the final account balance for a hypothetical example by 28%."

True enough. But this is scarcely a 401(k)-specific issue. Also, as discussed previously in this column, most 401(k) participants pay considerably less than 1.5% in annual fees;

That's it for the article's 401(k) critiques. Then Olen writes about annuities, declining real wages, college costs, and national savings rates. All fine, but only peripherally related to the initial claim that the 401(k) is a sham.

To my mind, there are two legitimate criticisms of 401(k) plans.

The simpler one is that fees are too high, particularly with target-date funds. With cash paying nothing, government bonds 3%, and stocks perhaps not much more over the next decade, target-date series that have tens of billions in assets shouldn't be charging 0.70% or 0.80% per year. Market and political pressures will surely force those figures lower. I don't see a charge of nearly 1% for a default retirement investment service as being sustainable.

The second, trickier concern is the very notion of a voluntary retirement plan. This, really, is what lies behind the recent series of attacks on 401(k) plans. Is the nation best served by a voluntary approach? Or should retirement savings be mandated and (presumably) have more government involvement? That is the argument that the critics should tackle, rather than leave their element to tackle the details of 401(k) plans. I would look forward to such a discussion.  

John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for Morningstar.com 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.