Why the industry needs to accept some blame for 'flaws' in PBS Frontline's 'Retirement Gamble'

Brooke’s Note: Just because you’re paranoid doesn’t mean…you know the rest. I think there’s an ironical phrasing that can be used, too, for the people who are more shocked, shocked by the “shock” value of PBS Frontline than by anything that it revealed. How about: Just because a journalist achieves shock value doesn’t mean that the subject matter isn’t pretty darn shocking. Yes, those of us who really know the business know it could have been much, much better — and there was at least one overreach. The documentary was being done by a person, Martin Smith, who is — by his own frank admission — keeping a small production company going past retirement age because he doesn’t have enough to retire on. In other words, one behind-the-eight-ball baby boomer artsy type takes on the mutual fund and 401(k) business. You can see the glass as half empty on that; I see it half full. Smith had the courage to show that aspect of ourselves that we hide more than our sexual quirks — money issues. Sure, he could have balanced the PBS piece by showing how well Mitt Romney is prospering with his retirement account. But really, would that have proven the efficacy of our free enterprise retirement system? The financial services industry has long made it a point to confuse the hell out of consumers so that they buy their crap and pay their exhorbitant prices. Then when one of the confused consumers has the brass to challenge all those obfuscations, he is called a hack for being confused … by all those obfuscations. I’m sorry. I’m having a hard time working up good animus against the journalist.

After months of work and research, the Public Broadcasting Service aired the Frontline report, “The Retirement Gamble” at the end of April, billing it as a special look into Americans preparing financially for retirement and focusing particularly on the problems with popular 401(k) products.

The hour-long show has sparked criticism from advisors and 401(k) providers who were quick to hurl accusations that the show was inaccurate, shallow, and too heavily placed the blame for its shortcomings at the feet of Wall Street.

Articles, blog posts, and commentary argued that “The Retirement Gamble” focused on the wrong issues, primarily fees, and made 401(k) plans out to be fundamentally flawed. The show, critics say, didn’t put enough emphasis on the individual’s need to save and didn’t dive into the challenges faced by plan sponsors. See: The PBS 'Frontline’ 401(k) documentary names suspects but leaves out major culprits of the theft of the American retirement.

One critic, Phil Chiricotti, president of the Center for Due Diligence, says objective and balanced coverage of 401(k) plans is impossible to get from mainstream media because many of its number have already have decided the 401(k) is bad for the consumer. This attitude played out in the PBS special too, he says. “If a fiduciary standard applied to the media and our policymakers, they would all be in jail,” says Chiricotti.

First-person journalism

The award-winning producer and director of the film, Martin Smith, previously helmed other documentaries for “Frontline” including Money, Power & Wall Street; The Untouchables; The Madoff Affair; College, Inc.; and Dot Con.

Smith runs his own small business — a four-employee production company — that provides 401(k) plans to its employees. During the PBS special, Smith confesses that he doesn’t even understand his own 401(k) plan and didn’t realize that he had picked a poor option for his company in his role as plan sponsor.

“You only get one shot at retirement,” says Smith.

If a smart journalist, looking for as much information as possible about retirement plans and interviewing dozens of plan participants, plan sponsors, and academics, still can’t understand his own retirement plan, then it may be that those doing the explaining aren’t doing a very good job. Some of the blame for inaccuracies and missing information in the documentary is reflective of confusion and missing information in the industry.

“I do think it is the fault of the industry,” says Tim Welsh, president and founder of Nexus Strategy LLC. “Most people take 401(k)s as a given, yet there isn’t a lot of education on the inner workings of the process.”

Blaming your tools

Chris Carosa: They made the conscious
decision to shock people.

Many of Smith’s critics argued that the “Frontline” piece mistakenly focused too heavily on fees, overemphasizing them as the main problem with 401(k) products and making too extreme a case for lower fees at any cost. In fact, the SEC has said that consumers should not simply opt for the lowest-fee products, but for products that offer the best return on the fees. See: Which three of DOL’s new 401(k) rules represent the biggest land mines for financial advisors and plan sponsors.

“It’s like cholesterol,” says Chris Carosa, author of the book “401(k) Fiduciary Solutions: Expert Guidance for 401(k) Plan Sponsors on how to Effectively and Safely Manage Plan Compliance and Investments” (Pandamensional Solutions, 2012), who also wrote extensively about the PBS special for Fiduciary News. “There’s good and there’s bad kinds.”

The PBS special used information provided by John Bogle, founder of the Vanguard Group Inc., that pegged average fees at 2% and argued that at 2% a consumer would lose two-thirds of his or her retirement nest egg. The study that calculation was based on been widely debunked, however, with 401(k) fees typically closer to 1%, which weakened the show’s overall point, Carosa pointed out in a four-part series on the special titled The Good, The Bad, The Ugly, and Final Word

At least some of the people professing to be appalled about the focus on fees were likely upset because they were exactly the kind of advisors who were charging outrageous hidden fees in 401(k) plans, says Rick Meigs, president of 401khelpcenter.com LLC. There were legitimate complaints that the special painted the 401(k) as inherently flawed, but that’s the fault of bad practitioners, not 401(k)s themselves, says Meigs.

“It’s like blaming the car because of a DUI,” he says.

Shock value

By focusing on the effect of fees and the hidden costs inside 401(k) plans, “The Retirement Gamble” went for a fairly simple message: Wall Street may be screwing you. That meant that the special couldn’t dive into other detailed issues regarding plan sponsors, disclosures, investment vehicles or other options for consumers.

Smith says they simply didn’t have time.

“Did we cover everything about retirement in 53 minutes? Of course not,” says Smith. The producers had to pick and choose what they included and they chose to go for what they felt were the most important and straightforward aspects of retirement planning.

But, many felt that they put the all the blame on big bad Wall Street.

Rick Meigs: It’s like blaming the
car because of a DUI.

“They made the conscious decision to shock people,” says Carosa.

Already out there

Little of the information in the documentary was news to most people in the industry — though it may have been new to plenty of consumers.

And, if some of “The Retirement Gamble” looked familiar, that’s because it was. “It was basically a rehash of “Can You Afford to Retire?” a special Frontline aired six years ago,” says Scott Pritchard, managing director of Advisors Access, a turnkey 401(k) program. That 2006 program was written by Hedrick Smith and Rick Young.

It’s a point Martin Smith concedes. “It’s a perennial topic for Frontline,” he says. This is the third show Frontline has done on the topic. “We never considered this investigative in the sense that it wasn’t information that was already out there.”

But, he argues that the information bears repeating and packaging as long as people continue not to understand the ins and outs of their retirement plans. And, lots of people don’t.

“It just deserves continued attention,” he says. And, while no sequel or follow-up is planned, it is certainly a topic that Frontline will continue to cover, Smith says.

Smith feels that the goal of this special was simply to remind the public about these issues. To that end, letting people know that their plans come with built-in fees is useful. And, while 2% was a figure multiple of the producers’ sources cited as the median fee paid by users, the math of losing gains still holds true at 1% or 1.5% or 0.5%, according to Smith.

“To a lot of people even 2% seems like a small fee,” he says.

He’s not wrong. Hidden fees can be buried or seem tiny in comparison to projected returns, easily hurting consumers trying to secure a safe retirement.

“I think PBS focused on the right thing,” says Steve Lockshin, chairman of Convergent Wealth Advisors LLC and co-founder of Advizent, an abortive enterprise that sought to brand RIAs with a seal of approval. “Fees are the foundation of the problem.”

Steve Lockshin: Fees are the foundation
of the problem.

Telling the right story

401(k) experts will tell you that hidden fees, kickbacks and non-fiduciary salespeople signing participants up for retirement plans that don’t serve their best interests are all part of a bigger problem — not that anyone outside the industry wants to hear about those details. Most consumers’ “eyes start to glaze over,” says Smith, when you talk about retirement, much less if you delve into the nuances of fiduciary standards. See: Why gathering big-time 401(k) assets — and charging regular fees — is well within reach for most experienced RIAs.

Studies have shown that the word “fiduciary” actually has negative connotations for most consumers, who assume it’s a bad thing, Lockshin points out, making it hard for people to differentiate between those financial advisors who have their best interests in mind and those who don’t — and further complicating the topic. See: How 10 top groups define 'fiduciary’.

But whose fault is it if the important information can’t be presented in an understandable manner?

Partially, advisors are doing themselves a disservice by making things more complicated than they need to be. Why talk about revenue sharing and 12(b)-1 fees if it’s not going to mean anything to the consumer? Retirement, at its heart, is actually very simple, say Meigs. See: How the new 12(b)-1 fee restrictions could transform the financial advisory industry.

“It’s not complex at all. 401(k)s are easy to understand,” he says. When people feel like they can’t or don’t understand, often the real thing they don’t understand is money management and their economic situation. Meigs says they’re trying to do an advisor’s difficult and confusing job all on their own.

At that point, the onus of trying to connect with these consumers and help them understand the intricacies of retirement may be on the advisor. And advisors have been trying to adequately explain what they do, how RIAs differ from brokers (especially when it comes to retirement planning), and how people should prepare for retirement. See: A refresher on how an advisor should approach the needs of clients as they near retirement.

“What is the story we can tell?” asks Carosa. Frontline was just one in a series of efforts to find the eureka moment that will make people understand the situation, he says.

“Nobody’s found it yet.”

“It’s an issue of trying to bail the ocean,” says Lockshin of the problems of explanation.

A matter of labels

In the special, Smith talks about his own 401(k) and his role as a plan sponsor. He says he realized his plan was charging him hidden fees and not doing the best for him or his employees only after examining it as part of the PBS special.

He’s not alone. Lockshin says he was livid when he found out that the bank, which manages his firm, had him on an S&P 500 index option that charges 55 basis points — something he could get from Vanguard for 5 basis points.

Lockshin believes that if those who who make commissions or have a conflict of interest were called simply brokers and those who didn’t were advisors, it would be easier for consumers to know what kinds of products they were being offered and to make simple judgments. See: RIAs and B-Ds don’t mix, says Duane Thompson at MarketCounsel Summit 2011.

Spurring debates

It’s unlikely that such a regulation will happen soon or that there will be any sweeping changes in the wake of the “Frontline” piece, even though changes to disclosures and fiduciary standards have been in the works for years.

“The president didn’t call me,” jokes Smith. The Labor Department did, however, feature the program on its website (the PBS program can be viewed on the PBS “Frontline” website in its entirety). Smith says his goal was simply to make a documentary that informed people and, then, maybe a few more consumers will ask their own questions.

That may have worked. Meigs says he got a number of questions and has heard from plenty of advisors who also got questions from their clients in the wake of the special.

Smith says that he’s been more aware since doing the piece, though he reportedly hasn’t changed the flawed 401(k) plan that he mentions in the special. He did double-check a fund’s marketing piece just the other day, he says, to try and find the fee disclosures, and was led in dead-end circles that never clearly laid out what the fund would cost him.

“I think it was reasonably well-done TV. Exposés like that are good,” says Meigs.