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Rekenthaler Report

Purveyors of Doom

The right and left both talk nonsense.

Politically Speaking
I've done my best to avoid the subject for five months now. Morningstar is not a political website, nor am I a political columnist. But I can no longer avoid the eight-letter word: politics. It dominates the current investment scene. From both the right and the left, Chicken Little predictions dominate the media reports.

The Sky Is Falling! (Version 1)
The right, of course, cries warnings about stock prices. 

One might think that, as believers in American exceptionalism and the superiority of American ways and customs, the right would be perpetually bullish on the prospects for American stocks. Such is not the case. It is in the right-wing media that most prophecies of market doom are to be found. It is among right-wing gatherings that the greatest fussing occurs about the power of China and the alleged inevitability of Chinese dominance.

Some of this gloom owes to the fact that a Democrat is president. During the Reagan years, The Wall Street Journal op-ed section printed column after column lauding the stock market's surge and contrasting that performance with the weak results during the Carter years. The Journal's highly influential editorial board directly made the argument that a Republican presidency was good for business and the stock market, while a Democratic presidency was not.

(The Journal, understandably, has backed off this line of argument. As investment advice, it proved to be spectacularly wrong: U.S. stocks climbed almost nonstop during the Clinton years, were rocked twice under George W. Bush, and have surged once again during the Obama presidency. The claim also fails to pass even the softest standards of common sense, as presidential decisions have little effect on the key drivers of stock prices--corporate profits and interest rates. Even today, though, the Journal sometimes cannot resist temptation.)

Much of the gloom, though, is president-free. The business press offers up plenty of reasons for fear during the Republican years, too. In the aftermath of the crash of October 1987, for example, which spanned the final year of Ronald Reagan's presidency and the first of George H.W. Bush's, many mainstream articles predicted that stocks would retrace the pattern of the Great Depression. I vividly remember the attention given at that time to Bob Prechter and his prediction that the Dow Jones Industrial Average would decline to a mere 400. 

It is, in a word, marketing. Those on the right tend to be relatively old and wealthy, meaning that they have something to lose. For them, fear is good marketing. Fear not only gives the listeners what they want to hear, in a horror-film sort of way, but it also sounds sophisticated. If bliss lies in ignorance, after all, then misery lies in knowledge. Clucking at the foolishness of the masses is a fine way for an investment (or financial) advisor to advertise his worldliness.

The claim here is not that stocks are inevitably a sound investment, nor that U.S. stocks are currently underpriced, nor that the powerful rally of the past four and a half years will continue. They are not; they are not; and I suspect not. It is rather that the prospects of American businesses, and of their stocks, are better than is commonly thought. The bad news plays well, politically. The good news does not.

The Sky Is Falling! (Version 2)
If the right is susceptible to fears about losing its accumulated assets, the left is vulnerable to fears about the accumulation process itself--specifically, to claims that it is being cheated out of its retirement. This, too, makes sense given the constituency. The left is not only younger, and thus more engaged with preparing for retirement, but it's also more trusting of government solutions and less trusting of private enterprise. Thus, it's ripe to hear tales about wicked financial institutions cheating it out of its golden years.

And hear it does. I've covered this topic in several columns, most notably in reviewing April's PBS Frontline "expose" of the retirement industry and Helaine Olen's article "401(ks) are a sham" in Salon. Such critiques follow a consistent pattern: 1) an initial assertion that the United States is in a retirement crisis; 2) claims of high 401(k) costs; and 3) a strong sense of helplessness.

I dispute all three items. With the first, the left's narrative is that U.S. workers once enjoyed fat corporate pensions, but now that companies have abandoned the defined-benefit schemes and left employees to fend for themselves, it's all falling apart. Uh-huh. Fat corporate pensions for those fortunate enough to work for Fortune 500 companies, perhaps, assuming that they stayed at the firm their entire careers. For most, though, the good ol' days never were that good.

Consider the data from a 2009 Congressional report on the retirement income of Americans over history, covering the period from 1968 to 2008. Shown below is the mean annual income for those aged 65 or older at a given time, along with the percentage of those retirees who received pension income from a former employer, and, finally, the mean percentage of total income that pension income provided. (The pension figures are not shown for 1970, as these items were not collected prior to 1976.)


I do not think that makes the case that U.S. retirement prospects are plummeting.

As for 401(k) costs, as I've written previously, many smaller 401(k) plans are indeed bedeviled with annual expenses that exceed 1.5%. While there are valid economic reasons for those costs, relating to the smaller companies' lack of scale and to the distribution costs that come from having salespeople call on small business owners and explain the structure of the plans, they are nonetheless unacceptably high to employees. The U.S. can't simultaneously ask workers to finance their own retirements and lock them into plans that charge fees at that level. That must change. In that, I fully agree with the left's critique.

But ... most employees are in plans that charge considerably less than the 1.5% annual figure that is typically mentioned in "401(ks)-are-bad" articles. Many large companies have fees from 0.25% to 0.75%, with some giant multinationals landing even below the bottom of that range. In addition, market forces are steadily pushing prices down. In summary, while this claim does have some bite, the reality is not nearly as bad as portrayed.

As for the final item, that of helplessness, that again is marketing. People reading articles about failure--in this case, the alleged failure to prepare properly for retirement--quite naturally wish to read that it is not their fault. The government, 401(k) providers, financial advisors, whomever--just not them. It should come as no surprise, therefore, that articles about the U.S. "retirement crisis" inevitably focus on the behavior of everybody but the employee. They never wonder why most countries that have lower incomes, higher taxes, a higher cost of living, and a stronger social safety net than the U.S. also have higher average savings rates.

I do. I would love to read a well-researched article about why U.S. savings rates are below those of countries that seemingly should have lower savings rates, rather than higher, than the U.S. It would sure beat reading the 700th version of the American retirement scandal.

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. Especially with today's column!