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On 401Ks April 22, 2009

Posted by shaferfinancial in Finance, Uncategorized.
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60 Minutes did a section on 401Ks that mimicked what I have been telling folks for several years.

Thanks to NAKED CAPITALISM for this partial transcript:

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When employers began turning 401(k)s into retirement plans, the financial community was not shy about promoting them as such. The prospect of trillions of dollars in the hands of unsophisticated investors opened the door for all sorts of potential abuses.

“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.”

“There clearly has been a raid on these funds by the people of Wall Street. And it’s cost the savers and the future retirees a lot of money that would otherwise be in their account, independent of the financial collapse,” Rep. George Miller [D-CA] said.

Congressman Miller is chairman of the House Committee on Education and Labor, and a staunch critic of the 401(k) industry, especially its practice of deducting more than a dozen undisclosed fees from its clients’ 401(k) accounts.

“Now you got a bunch of economic wizards jumping in and taking money out of your retirement plan, and they don’t wanna tell you how much, you can’t decipher it in simple English, and they’re not interested in disclosing it, or having any transparency about it,” Miller told Kroft.

“And most of the people that look at their 401(k)s have no idea that these fees are being taken out?” Kroft asked.

“No. Where would you find it? Where would you find these fees in this prospectus? You can look on any page you want, and when you’re all done reading it, and you will find some of the fees and the commissions here, but you won’t find them all, and I’ll bet you won’t find half of ’em,” Miller said.

There are legal fees, trustee fees, transactional fees, stewardship fees, bookkeeping fees, finder’s fees. The list goes on and on.

Miller’s committee has heard testimony that they can eat up half the income in some 401(k) plans over a 30-year span. But he has not been able to stop it.

“We tried to just put in some disclosure and transparency in these fees. And we felt the full fury of that financial lobby,” he said.

David Wray, a lobbyist for the 401(k) industry, says he favors disclosing the fees, but his partners in the financial industry don’t.

Asked if he thinks most people know these fees exist, Wray said, “I think they know that there are fees. They don’t know exactly how large they are.”

“Why do you think the financial services industry is opposed to fee transparency?” Kroft asked.

“I don’t know that they’re opposed to it. I think the issue is that…,” Wray replied.

“You don’t think they’re opposed to it?” Kroft asked. “You’re a lobbyist in Washington, right? You know they’re opposed to it. …George Miller hasn’t been able to get a bill to the floor.”

“I think they want to keep the systems as simple and not make changes. They like the way things are. And whenever you push people out of their comfort zones, you know, it’s an issue,” Wray replied.

“I mean, they’re comfortable with the situation because they’re making a ton of money or they have made a ton of money,” Kroft said.

“Well, and their systems are set up in certain ways. You know, this is gonna be a big change,” Wray replied.

60 Minutes wanted to ask Wray, who’s been so bullish on 401(k) plans, one last question about what the future holds for people like Terry and Donna McNally and Kathleen Coleman.

“Most of the people that we’ve talked to are 50 and 60 years old and have sustained these losses say there is no way they’re ever gonna make them back. Do you agree with that?” Kroft asked.

“I think we have to be truth tellers,” Wray replied. “I think that when a person has hit this point, and we’ve had this unfortunate situation, I don’t think we can misrepresent what the possibilities are.”

“And reality is that money’s not coming back that they’ve lost,” Kroft said.

“They can’t count on it,” Wray replied. “They have to…it may. Maybe they have long, maybe if they work ten more years, it’ll come back by the…but it’s important that they not have unrealistic expectations.”

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Where have all those critics of life insurance as a retirement vehicle gone too?  Perhaps, hiding from the folks they sold those mutual funds to?  Now more than ever, people need advice based on real data about what works and doesn’t work.  Give me a call 727.804.9271!

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Comments»

1. Claire Fuller - April 23, 2009

Thanks for bringing up all those fees David. I’m afraid when I retire the market will be at another downswing again.

shaferfinancial - April 23, 2009

Another reason to consider investing in EIULs in my opinion; if you are going to pay heavy fees then you might as well get some benefits [tax avoidance, guarantees, no negative return years]!


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