Americans Aren't Saving Enough for Retirement, but One Change Could Help - NYTimes.com - 0 views
www.nytimes.com/...but-one-change-could-help.html
retirement conflict of interest wall street saving
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On average, a typical working family in the anteroom of retirement — headed by somebody 55 to 64 years old — has only about $104,000 in retirement savings
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more than half of all American households will not have enough retirement income to maintain the living standards they were accustomed to before retirement,
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83 percent of baby boomers and Generation Xers in the bottom fourth of the income distribution will eventually run short of money.
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More than a quarter of those with incomes between the middle of the income distribution and the 75th percentile will probably run short.
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The standard prescription is that Americans should put more money aside in investments. The recommendation, however, glosses over a critical driver of unpreparedness: Wall Street is bleeding savers dry.
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“A greater part of the problem is the failure of investors to earn their fair share of market returns.”
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His observation suggests a different policy prescription: shoring up Americans’ retirement requires, first of all, aligning the interests of investment advisers and their clients.
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Actively managed mutual funds, in which many workers invest their retirement savings, are enormously costly.
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The White House’s Council of Economic Advisers argues that “conflicted advice” by advisers who get payments from the funds they recommend reduces the annual returns to investment by 1 percentage point, a more modest penalty than Mr. Bogle’s analysis
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Assuming an annual market return of 7 percent, he says, a 30-year-old worker who made $30,000 a year and received a 3 percent annual raise could retire at age 70 with $927,000 in the pot by saving 10 percent of her wages every year in a passive index fund. (Such a nest egg, at the standard withdrawal rate of 4 percent, would generate an inflation-adjusted $37,000 a year more or less indefinitely.) If she put it in a typical actively managed fund, she would end up with only $561,000.
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In 1979, almost two in five private sector workers had a defined-benefit pension that would pay out a check until they died. Today only 14 percent do. Almost one in three, by contrast, must make do with a retirement savings account alone to supplement their Social Security check.
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nobody was paying attention to the safeguards that might be needed when corporate retirement funds managed by sophisticated professionals were replaced by individual 401(k)s and Individual Retirement Accounts.
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“Wall Street makes no money on low-cost index funds,” said David F. Swensen, who runs the investment portfolio for Yale. “That is the problem.”
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Harvard and colleagues from M.I.T. and the University of Hamburg sent “mystery shoppers” to visit financial advisers. They found that advisers mostly recommended investment strategies that fit their own financial interests. They reinforced their clients’ misguided biases, encouraging them to chase returns and advising against low-cost options like low-fee index funds.
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For all their flaws, 401(k) plans have a fiduciary responsibility to act in participants’ best interest. Managers of I.R.A.s, by contrast, are not legally bound to put their clients’ interests first. They must offer “suitable” products — a much squishier standard.
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By contrast, a passive index fund, like Vanguard’s Total Stock Market Index Fund, costs merely 0.06 percent a year in all.
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In 2010, the Labor Department proposed imposing fiduciary responsibility on I.R.A. advisers. The resistance from Wall Street was so fierce that the Obama administration was forced to back down. Last month, the administration tried again.
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Unlike regulations in Canada and some Western European countries, which have essentially banned kickbacks from funds to investment advisers, the Obama administration’s proposed rule does not directly attack conflicts of interest.