Folly, Fees and Frauds
On their own, the amount of money Americans have put aside for their post-work lives sounds extraordinary. According to the Investment Company Institute, the lobbying arm of the mutual fund industry, we had $20.8 trillion in retirement savings, divided between individual retirement accounts, defined contribution plans, defined benefit plans, government plans and annuity reserves.
When broken down to the individual level, those numbers add up to nowhere near enough money. According to a recent report issued by the National Institute on Retirement Security, the median amount a family nearing retirement has saved for their post-work lives is $12,000. As for the magical 401(k)? If a household where the earners are between the ages of 55 and 64 does have a retirement account, they barely hit the six-figure mark at $100,000—a far cry from $1 million we’re told we need.
Yet whether the stock market goes up, down or sideways, the financial services sector makes out when it comes to your retirement accounts. How much do they earn? Astonishingly, we don’t know the answer. In 2008, Bloomberg magazine polled a group of pension consultants and came to the conclusion that 401(k) fees alone totaled $89.1 billion annually. Ghilarducci, who recently took a more all-encompassing look at American retirement assets, and included IRAs and pensions in her total, pegged the number at $500 billion.
The industry gets away with this because it has what amounts to a captive audience. While there is some evidence that the recent Department of Labor requirement to reveal 401(k) plan fees to participants—something that was not even enacted till last year—has brought expenses down, knowledge does not leave consumers in the driver’s seat. If you discover your company plan is sub-par — the fund choices are poor, or the expenses are too high — all you can do is complain to your human resources department and hope they decide to change plans.
Think of it this way: While we hope our employers comparison shop when they select a 401(k) retirement plan to offer their employees, that’s not a given. Employees simply have to take what is given to them. It’s not like you were shopping for a blazer at Saks Fifth Avenue, looked at the price tag, and decided to go across the street to Zara instead. Unless you get a new job, you are stuck.
As a result, the most benign sounding investments can astonish with what they charge consumers unfortunate enough to put their money in their funds. Take the highly popular 401(k) offering of target date funds. These investments are meant to take the work out of investing, and grow gradually more conservative with time. Time will tell if this works for the investor, but it’s already clear it works quite well indeed for the financial services industry. According to industry estimates, they generated $2 billion in revenue in 2008, a number that is expected to increase to $13 billion by 2018.
How do they do it? In part it is the tremendous growth in assets into the investment class since the federal government in 2006 began allowing companies to default investors into them. But it is also their extraordinary fee structure. While the average fee for any mutual fund is .80 percent, the number for target date funds is a hefty 1.08 percent annually. Some funds are much, much worse. Legg Mason’s Target Retirement Series charges 1.47 percent expense ration for the privilege of taking your money. How do they get away with it? Well, the industry promotes them as “set-it-and-forget-it” funds, thereby attracting the sort of investors most likely not to ask many questions.
And while these numbers sound like peanuts, they are anything but. As the Department of Labor reveals:
Assume that you are an employee with 35 years to retirement and a current 401(k) balance of $25,000. If returns on your investment in your account over the next 35 years average 7 percent, and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to the account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.
And these people are the lucky ones. Half of Americans have no workplace retirement accounts at all.
As for the claim that those without workplace retirement savings plans can simply use Individual Retirement Accounts instead? Well, the fees the industry earns on IRAs puts the 401(k) money into the shade. Brokers not working in the best interests of their clients make the vast majority of IRA investment recommendations. Not only is this quite legal, the financial services industry is actively fighting attempts by the Department of Labor to change the situation, claiming it would not be able to afford to offer many low- and middle-income investors advice under an enhanced standard of care.
Think about this for a moment: the retirement industry is actually admitting it doesn’t have a viable business model if it needs to put its customers first.
So instead, the current situation allows for the indiscriminate marketing of all sorts of financial products as long as they meet the standard of “suitability,” which could best be described as “okay.”
Nowhere is this more clear than in the marketing of annuities to the public. Annuities are among the most confusing financial products in existence.
When the academic experts discuss the need for Americans to consider purchasing annuities with their retirement savings so they don’t run out of money, they are talking about mean immediate or deferred annuities, that is a product that gives you a guaranteed stipend for life in return for a one-time payment of money.
But the products that make the big money for insurance brokers are the infinitely more complicated variable and equity indexed annuities. These are stock-market based investments. They come with multiple fees for consumers—and, high commissions for those selling them.
Not surprisingly, the combination of consumer confusion and money incentives causes no small amount of bad behavior by the sellers of annuities. All too many people are sold annuities they have no business purchasing. There is currently a case in California where a broker is looking at jail time after being convicted of selling an indexed annuity to a woman suffering from dementia. (The case is on appeal.)
I’ve sat through presentations where elderly audiences are told that Social Security’s future is “shaky” and “uncertain” and a stock-market based annuity can protect them from the likelihood of outliving their savings. Sellers tout the fact that they offer customer consultations at no charge, but are less than clear about the fees they earn from financial service and insurance companies for successfully pushing the products.
The response by the financial service industry to our retirement crisis has not been self-examination. There has been no attempt to ascertain if it held out a false mirage to millions of Americans. Instead, financial hustlers and their media mouthpieces say the fault lies with Americans who either did not invest their savings properly or don’t don’t have enough money saved up because we spend too much of it.
This, frankly, ignores reality. Salaries for the majority of us are, when translated into constant dollars, falling. The median household is earning eight percent less income adjusted for inflation today than it did in 2000. In the first quarter of 2013, wages fell by the greatest amount ever recorded.
At the same time, costs of things we can’t do without continue to rise. College costs have tripled since the early 1980s. The amount of money students are borrowing to pay tuition bills is skyrocketing, and all but doubled from 2005 to 2012 to $1.1 trillion. Healthcare costs have also soared. The New York Times recently reported the cost of giving birth has tripled since 1996. At the same time, patients are increasingly responsible for ever greater amounts of their medical expenses: credit reporting agency Transunion recently claimed an astonishing 22 percent rise in out-of-pocket hospital expenses over the past year.
People find it all but impossible to save in this environment. Our national savings rate hovered around 10 percent in the late 1970s and early 1980s. Today, it is a little more than 2 percent. Just take a look at what happened when companies began to adopt automatic enrollment plans for 401(k)s, that is, forcing people to opt-out of retirement plans instead of filling out papers to join up. Yes, the number of people contributing to deferred contribution accounts increased – but so too did what industry insiders call “the leakage” rate – that is, people borrowing against or withdrawing the monies in their accounts (and if that money isn’t repaid, the consumers withdrawing it need to pay penalties for accessing it). That number is now close to 25 percent.
The truth is this: the concept of a do-it-yourself retirement was a fraud. It was a fraud because to expect people to save up enough money to see themselves through a 20- or 30-year retirement was a dubious proposition in the best of circumstances. It was a fraud because it allowed hustlers in the financial sector to prey on ordinary people with little knowledge of sophisticated financial instruments and schemes. And it was a fraud because the mainstream media, which increasingly relies on the advertising dollars of the personal finance industry, sold expensive lies to an unsuspecting public. When combined with stagnating salaries, rising expenses and a stock market that did not perform like Rumpelstilskin and spin straw into gold, do-it-yourself retirement was all but guaranteed to lead future generations of Americans to a financially insecure old age. And so it has.
This article does not offer any concrete solutions to the train wreck that is ahead of us as a society.
I’ve said it before and I’ll say it again: It’s great to be unemployed and retired if you can afford it!
There have been numerous proposals, including President Obama’s MyRA program and senator Tom Harkin’s proposal for the Universal, Secure and Adaptable (USA) Retirement Funds Act of 2014, to address eroding retirement security.
Both proposals are yet more attempts to address the fact that Americans are not saving enough for retirement. But the proposals fall far shot by “trillions” of dollars.
The plain truth is that more than four in five older Americans expect to keep working during their latter years, a sign that traditional retirement is out of reach for vast swaths of society. According to a new survey poll conducted by the Associated Press-NORC Center for Public Affairs Research, among Americans ages 50 and older who currently have jobs, 82 percent expect to work in some form during retirement.
In other words, “retirement” is increasingly becoming a misnomer.
For those who have been dependent on employment and/or welfare, the problem is that financially sustainable retirement is and will no longer be a reality. Even with Social Security, which is funded through payroll taxes called the Federal Insurance Contributions Act tax (FICA) and/or Self Employed Contributions Act Tax, (SECA), one must have had a job to be eligible for the entitlement––and the amount of Social Security is based on the income level generated from one’s employment record of payroll tax contributions.
Employer-provided pensions continue to decrease and personal savings is not the norm among the vast majority of American households who must spend virtually every earned dollar on living expenses. While increasingly individuals are finding it necessary to continue working in retirement to supplement their income, most older Americans discontinue full-time career work and struggle to meet obligations with minimum-pay part- and full-time jobs. A proportion of retirees also receive income from welfare programs, such as Supplemental Security Income and other life-support services funded through tax extraction and government debt.
This perspective should serve as the “reality” from which to explore prospects for effectively dealing with eroding retirement security.
Senator Harkin’s proposal has all the downsides of the “MyRA” and nothing to recommend it. It claims it offers lifetime income security funded out of current savings, meaning further reductions in consumption out of already inadequate incomes. It also aggregates everything into a “private sector” institution that is custom designed to be “too big too fail.”
As with President Obama’s MyRA proposal, Senator Harkin’s proposed Universal, Secure and Adaptable (USA) Retirement Funds Act of 2014 will not succeed in providing any real, substantial retirement security for the majority of Americans whose jobs do not earn more than substance week-to-week and month-to-month wages. Both plans are designed to encourage Americans to save for retirement and require personal savings and denial of consumption. This is unrealistic given that the Americans with the least opportunity must reduce what is inadequate consumption income in order to accumulate savings for retirement, which for most Americans will be inadequate.
Does anyone really believe that the interest rate to be paid under these programs will be sufficient and able to avert the decline in the value of the money as the government continues to flood the economy with increasingly non-asset-based debt?
Both proposals rely on the requirement to reduce consumption in the economy at a time when what is needed is expansion of the economy supported by increased consumption.
As my colleague Michael Greaney at the Center for Economic and Social Justice (www.cesj.org) states, “under the prevailing Keynesian paradigm, of course, ‘saving’ is always defined as the excess of income over consumption. If you want to save, then, the iron assumption of Keynesian economics is that you must consume less.”
The American consumer is being put into an impossible situation of being asked to consume more to drive the economy and reduce saving, and at the same time are being told they must reduce consumption dramatically in order to accumulate sufficient savings for retirement.
Of course, the whole problem would go away if we financed both retirement and wealth-creating, income-producing physical productive capital needs out of “future savings,” thereby increasing the capacity to consume and support the economy while simultaneously building financial security for every American citizen.
A far better and productive approach would be to create a new way for working and non-working Americans to start their own retirement savings: MyCHA. CHA stands for Capital Homestead Account. It would be a super-IRA or asset tax shelter for citizens. The Treasury should start creating an asset-backed currency that will enable every child, woman and man to establish a CHA at their local bank to acquire a growing dividend-bearing stock portfolio comprised of newly-issued stock representative of viable American growth corporations to supplement their incomes from work and all other sources of income.
We can create new asset-backed money for investment through the existing but dormant Section 13(2) rediscount mechanism of each of the 12 regional Federal Reserve banks that would be backed by “future savings” (that is, future profits from higher levels of marketable goods, products, and services).
The CHA would function as a savings and income account that effectively would build a nest egg over time, using interest-free, insured capital credit loans. A CHA would be offered to EVERY American, whether employed or not. Of course, those employed may also have additional opportunities to acquire personal ownership in their companies using an Employee Stock Ownership Plan (ESOP) trust financial mechanism.
The CHA would process an equal allocation of productive credit to EVERY citizen exclusively for purchasing full-dividend payout shares in companies needing funds for growing the economy and private sector jobs for local, national and global markets. The shares would be purchased on credit wholly backed by projected “future savings” in the form of new productive capital assets as well as the future marketable products and services produced by the newly added technology, renewable energy systems, plant, rentable space and infrastructure added to the economy. Risk of default on each stock acquisition interest-free loan would be covered by private sector capital credit risk insurance and reinsurance, but would not require citizens to reduce their funds for consumption to purchase shares. There would be no prerequisite requirement to qualify for an annual set capital credit loan other than American citizenship.
This idea to stimulate economic growth and provide retirement security for EVERY American is based on the premise that what is needed is for the system to facilitate spreading the ownership of productive capital more broadly as the economy grows with full payout of dividend earnings, without taking anything away from the 1 to 10 percent who now own 50 to 90 percent of the corporate productive capital wealth assets. In doing so, the ownership pie would desirably get much bigger and their percentage of the total ownership would decrease, as ownership gets broader and broader.
This would benefit the traditionally disenfranchised poor and working and middle class, who are propertyless in terms of owning productive capital assets. It would also result is tremendous economic growth, which would benefit everyone including the already wealthy ownership class, and create opportunities for real jobs, not make-work as an expanded economy is built that can support general affluence for EVERY American citizen. Thus, as productive capital income is distributed more broadly and the demand for products and services is distributed more broadly from the earnings of capital, the result would be the sustentation of consumer demand, which will promote economic growth. That also means that over time, EVERY child, woman and man could accumulate a diversified portfolio of wealth-creating, income-producing productive capital assets to provide economic security in retirement and not be dependent on having to work during retirement or rely on government-assisted welfare.
One might ask how we failed to grasp the significance of productive capital’s input and the necessity for broad private sector individual ownership? Unfortunately, ever since the 1946 passage of the Full Employment Act, economists and politicians formulating national economic policy have beguiled us into believing that economic power is democratically distributed if we have full employment––thus the political focus on job creation and redistribution of wealth rather than on full production and broader productive capital ownership accumulation. This is manifested in the belief that labor work is the ONLY way to participate in production and earn income. Yet, the wealthy ownership class knows that this notion is idiotic.
In real productive terms, productivity gains are the result of tectonic shifts in the technologies of production, which consequently eliminates the need for human labor, destroys jobs, and devalues the worth of labor.
One should ask what form would the structural reforms take. Employment in this new enlightened age would start at the time one enters the economic world as a labor worker, to become increasingly a productive capital owner, and at some point to retire as a labor worker and continue to participate in production and to earn income as a productive capital asset owner until the day you die. As a substitute for inheritance and gift taxes, a transfer tax would be imposed on the recipients whose asset holdings exceeded $1 million. This would encourage those owning concentrations of productive capital assets (effectively the 1 to 10 percent) to spread out their monopoly-sized estates to all members of their family, friends, servants and workers who helped create their fortunes, teachers, health workers, police, other public servants, military veterans, artists, the poor and the disabled.
Other stipulations for the structural reform would entail tax policy reform to incentivize corporations to pay out all profits to their owners as taxable personal incomes to avoid paying stiff corporate income taxes and to finance their growth by issuing new full-dividend payout shares for broad-based individualized employee and citizen ownership with full-voting rights.
We need to encourage the insurance industry to expand their product lines to market Capital Credit Insurance to cover the risk of default for banks making loans to Capital Homesteaders under the proposed Capital Homestead Act. Under the provisions of the Act, risk of default on each stock acquisition loan would be covered by private sector capital credit risk insurance and reinsurance issued by a new government agency (ala the Federal Housing Administration concept), but would not require citizens to reduce their funds for consumption to purchase shares.
The end result is that ALL American citizens would become empowered as owners to meet their own consumption needs and government would become more dependent on economically independent citizens, thus reversing our country’s trend where all citizens are becoming more dependent for their economic well-being on the “state,” our only legitimate social monopoly.
Implementing the Capital Homestead Act would significantly empower ALL Americans to accumulate over time a viable, diversified ownership portfolio in our nation’s growth companies and create a truly unique, global-leading just and environmentally responsible Ownership Society that fosters personalism, creativity and innovation. Embarking on a new path to prosperity, opportunity and economic justice will expand growth of our market economy in ways that democratize future ownership opportunities, while building a future economy that can support general affluence for EVERY American.
In conclusion, both President Obama’s MyRA and Senator Harkin’s USA programs would be completely unnecessary if we had Capital Homesteading. President Obama, Senator Harkin and other elected representatives should instead advocate for the passage of the Capital Homestead Act.
See two references to the proposed Capital Homestead Act at http://www.cesj.org/homestead/index.htm and http://www.cesj.org/homestead/summary-cha.htm.
For more on how to accomplish such structural reform, see “Financing Economic Growth With ‘FUTURE SAVINGS': Solutions To Protect America From Economic Decline” at NationOfChange.org http://www.nationofchange.org/financing-future-economic-growth-future-savings-solutions-protect-america-economic-decline-137450624 and “The Income Solution To Slow Private Sector Job Growth” at http://www.nationofchange.org/income-solution-slow-private-sector-job-growth-1378041490.