Last night's episode of 60 Minutes led with a report on problems in the 401(k) world, most notably the fact that many millions of plan participants have seen their account values fall substantially over the last year and a half.
Reporter Steve Kroft and 60 Minutes had a chance to educate viewers on the realities of the 401(k) marketplace. Unfortunately, they settled for the too-easy television trick of (over-)dramatizing on a personal level rather than educating on a systemic level.
Kroft and his guests made a few good points. Among them:
- The vast majority of participants are novice investors. Expecting them to serve as prudent investment managers is entirely nuts.
- Participants who can't roll with short-term risk (financially or emotionally) shouldn't be exposed to it in the first place.
- Many of the setbacks of the last several months aren't 401(k) problems per se. They reflect problems with the financial system and the financial markets. The 401(k) marketplace needs work, but we can't/shouldn't blame it for everything that ails us.
All that said, however, California Congressman George Miller is exactly right when he says that the financial services industry has skimmed untold wealth from rank-and-file participants in defined-contribution plans. We're service providers ourselves, so we're not opposed to reasonable profit-making. But we are opposed to excessive profits derived from services that don't add value...and to super-cynical sales tactics that mislead sponsors and participants about where value can be added...and to anyone who concocts lame objections to maximum transparency on fees and expenses.
David Wray's halting non-answer to Kroft's repeated questions about mutual fund (and other service) providers' opposition to greater transparency was revealing in the extreme. Sometimes a guy just doesn't have any answers. This was one of those times.
We have one more objection, which goes back to our original point about 60 Minutes' failure to educate. That on-screen graphic listing various types of hidden expenses was extremely weak. What they included didn't strike us as particularly accurate, and what they excluded was hugely important. The segment should have spent two minutes or more helping people understand the hidden costs of most plans, and the factors that drive plans' hidden costs higher. Getting this right wouldn't be difficult, but it would require a greater commitment to education, and less time spent on the personal drama television seems to need. Alas.
UPDATE: One other sequence that was entirely on point, featuring Brooks Hamilton:
"The fact is that the typical 401(k) investor is a financial novice. They don't know a stock from a bond. And we give 'em a list of 20 or 30 mutual funds with really, really powerful names, you know, they sound like, 'Gee, that's where I want to have my money,'" Hamilton said.
"What are the, generally, the quality of the mutual funds in 401(k) plans?" Kroft asked.
"Mediocre," Hamilton replied. "I'm being real honest with you, with half the funds on the list really dogs, what people would characterize as dogs shouldn't be on the list to start with."