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Is Retirement Investing a Gamble?

  • Matt Bell
  • 2013 8 Jul
Is Retirement Investing a Gamble?

The PBS program Frontline recently aired a documentary called "The Retirement Gamble" that cast the entire financial services industry in a negative light, leveling especially harsh criticism at 401(k) plans and mutual fund fees. Were the criticisms warranted? And more importantly, what can retirement savers do to put the odds of success in their favor?

There is a Retirement Problem

The documentary opened with this statement: "Let's begin with one simple fact: America is facing a retirement crisis." Host Martin Smith noted, "Half of all Americans say they can't afford to save for retirement. One-third has next to no retirement savings at all."

No argument there — at least not with the program's description of the retirement landscape. It is consistent with the findings of other surveys, which show large numbers of Americans to be woefully under-prepared for retirement.

The Blame Game

Today’s workplace retirement plan of choice is the 401(k). Introduced in the late 1970s, such plans leave it up to employees to make three crucial choices: how much to save, what to invest in, and how to withdraw money during retirement.

According to the documentary, that's asking too much of the average worker. One 401(k) plan participant told interviewers, "It was overwhelming for me — the knowledge that you had to have in order to invest."

Robert Hiltonsmith figured prominently in "The Retirement Gamble." At first, he was depicted as just another struggling 401(k) participant. "I have a 401(k)," he said. "I save in it. It hasn't seemed to go up. It's awful. I kept checking the statement. I'd be like, 'Why does this thing never go up? This is weird.'"

Hiltonsmith turned out to be a young economist working at Demos, a New York City think tank. Confusion over his own company's 401(k) led him to take a closer look at the plan. Reading the prospectuses of each fund in his company's plan, Hiltonsmith noticed a surprising number of fees, many of which, he felt, were not clearly disclosed: "Why would you think 'Exp. Ratio' means fees? It was very opaque."

Over the course of a career, Hiltonsmith estimated, the average plan participant would pay more than $155,000 in fees.

Putting Fees Under the Microscope

All mutual funds have fees, just as every other type of business has costs of doing business that are passed along to its customers. Still, three points raised by the program are worth highlighting.

First, it's true that some mutual fund fees are not readily apparent. By the time an investor reads about a fund's performance, for example, the "exp. ratio" fees have already been paid to the fund company. "Exp." stands for "expense" and "ratio" means the fee is based on a percentage of a customer's balance. A fund with an expense ratio of 0.98% is charging $9.80 for every $1,000 a customer has invested in the fund to help cover its operating expenses. Some funds list a separate "12b-1 fee" used to recoup some of their marketing costs. While listed separately, those fees are already included in the overall expense ratio.

While a fund's prospectus discloses these fees, when an investor reviews his or her statement, the fees are not mentioned. Instead, they have already been subtracted from the investor's balance — and subtracted in calculating the fund's reported return. For example, a fund that delivers an 8% gross return in a given year while charging a 1.0% expense ratio would show a 7% return on its statement.

Second, mutual fund fees are not performance-based. In other words, if a fund charging a 1.0% expense ratio grows an investor's starting balance of $10,000 by 10% (a gain of $1,000), the fee is not 1% of the year's performance gain, it's 1% of the account's total balance. In other words, even if the account earns nothing for the year, you're still going to pay 1% of your total balance in fees.

Third, all else being equal, a fund charging lower fees will provide an investor with more money than a fund charging higher fees. So, investors choosing between two funds with similar strategies and performance records should choose the fund with the lower expense ratio. This is especially important for investors who hold their investments for a long time.

Some Action Steps

Additional cautions raised by the Frontline program:

Don't dip into your retirement savings. Keep the money there for its intended purpose: retirement. Martin Smith learned this lesson the hard way. While he started saving for his retirement in his 20s, he acknowledged tapping those savings several times over the years. Today, he is nearly 65 and has far too little saved.

Prioritize retirement savings over college savings. Again, this is a lesson Smith learned through trial and error. He said most of his savings went to pay for his kids' education expenses, although he noted that going through a divorce didn't help either.

Save more. This was actually the program's most glaring omission — no mention of how little people are saving in their workplace plans, except to imply that workers are not to blame. "Without knowing exactly how long you're going to live," Smith said, "it's difficult to guess how much you need to put away."

Robert Hiltonsmith begrudgingly acknowledged his own need to do more. "The truth is, I'm just going to have to find a way to save way more than you should have to." He pegged that amount at 10% to 15% of his salary.

Of course, none of us knows how long we will live. However, the Social Security Administration's longevity calculator, along with an honest assessment of your family's health history, should help generate a conservative estimate. That, coupled with an online tool, such as Fidelity’s myPlan Snapshot, can be used to run the numbers on how much you're likely to need in retirement and, by extension, how much you need to save each month.


Is retirement investing a complex process? Absolutely. Are individuals capable of handling this task? Yes, but it doesn't just "happen." The new retirement paradigm does require effort on the part of today's employees. But it's not so difficult as to be beyond the ability of most adults, if they're willing to learn a handful of basics. As you consider this responsibility, keep in mind the founding verse of Sound Mind Investing: "For God has not given us the spirit of fear; but of power, and of love, and of a sound mind" (2 Timothy 1:7).

Matt Bell is Associate Editor at Sound Mind Investing. Since its founding by Austin Pryor over 22 years ago, SMI has been providing clear, trustworthy, effective investment guidance to the Christian community. Some 10,000 subscribers look to its flagship publication, the Sound Mind Investing monthly newsletter, for biblical guidance on a range of financial issues and specific investment advice.

Publication date: July 8, 2013