It’s no secret that many Americans are struggling to save enough for their retirement. Once upon a time, it was common for employers to bear the responsibility for worker’s well being after retirement through defined-benefit pensions. Today, if a worker is lucky, he will have the opportunity to invest in a 401(k) plan, usually with his employer providing matching contributions up to a certain amount. It’s now the worker’s responsibility to make sure he puts away enough each month, and that the investments he chooses are a good value.
Of course, workers are also somewhat at the mercy of their employers provide a decent set of investment options. And unfortunately, too many employers don’t do a good job offering a manageable selection of low-fee funds. As I’ve written before, a small one percent difference in what fund managers charge in fees can mean tens of thousands of dollars missing from a worker’s nest egg when he reaches retirement age.
According to a report in CNNMoney, it’s not just workers in the real economy who are being taken advantage of through exorbitant fees and impossible-to-understand prospectuses. Employees of Fidelity Investments, one of the world’s largest mutual fund and financial services firms, are suing the firm for forcing its employees to choose from a vast and confusing array of the companies own mutual funds, many of which charge high fees and have shorter track records than competitor’s investment vehicles.
Companies that offer their employees 401(k) investment are supposed to act solely in the interest of the employee when deciding which plans to offer. The lawsuit argues that instead of looking out for their employees, Fidelity was hoping to accomplish two things: earn outsized fees from their own employees contributions, and help get younger, unproven funds off the ground. It takes a lot of effort and marketing for a mutual fund to attract enough capital to be profitable, so by encouraging it’s own employees to invest in young and unproven funds it could potentially help get new funds more outside business.
Fidelity denies the charges leveled in the lawsuit, telling CNNMoney, “”We believe the lawsuit is totally without merit, and we intend to defend vigorously against it. Fidelity has a very generous benefits package that provides significant contributions to our employee’s retirement planning.”
The episode, however, underscores the problems millions of Americans face in planning for their retirements. Surveys show that few Americans understand basic financial concepts like interest, inflation, or the differences between stocks and bonds. Yet these same folks are asked to choose between a dizzying array of mutual funds and other investment vehicles and determine how their fee structures will affect their retirement nest eggs. In the case of Fidelity, even employees who work for a mutual fund company found the process confusing enough that they were unable to choose funds that weren’t a rip off.
So what’s to be done about the crisis of retirement insecurity facing the nation? One would be for the Labor Department and the SEC to promulgate robust rules requiring investment advisors for 401(k) accounts to also have a fiduciary duty to investors. That would help prevent advisors from pushing high fee funds, and help more workers make better decisions with their money.
Another solution would be to decide to invest more in our Social Security program rather than cut it, as is the vogue today in Washington. The fact of the matter is that the 401(k) era has shown that many Americans are incapable of making wise decisions when it comes to their retirement. They don’t save enough, and they are apt to raid their retirement funds for other expenses somewhere along the line. A forced savings system like Social Security avoids these pitfalls. Raising Social Security taxes and making entitlement benefits more generous may not be the most popular idea, but it sure would go a long way in lessing the retirement crisis facing millions of Americans.