The Problem Without a Solution (Gwen Moritz Editor's Note)

Did you happen to watch last week’s PBS “Frontline” report called “The Retirement Gamble?” It was a very hard look at the 401(k) phenomenon and concluded what some of us had already figured out: The 401(k) plan is much more successful as an industry than it is as a personal retirement savings vehicle.

A lot of people are making a lot of money off 401(k)s, but not very many Americans can expect to retire comfortably if a 401(k) is our primary retirement savings vehicle. Even though the average balance in 401(k) accounts increased by 12 percent last year — mostly due to market gains, according to Fidelity Investments — the average balance at the end of 2012 for account holders age 55-59 was still only $134,600. And, ominously, the balance for account holders on the cusp of retirement in the 60-64 age range was slightly lower, $133,100.

More ominously still, these are the averages for people who actually have 401(k) accounts, which is about one-third of the total workforce. A lot of people truly can’t afford to sock away very much in their retirement accounts; remember, the median household income in Arkansas is less than $40,000 a year.

But it isn’t just the folks who are living on the edge of poverty who aren’t saving like they should. The primary reporter for this “Frontline” segment was Martin Smith, who owns and runs a small company whose primary product is documentaries for “Frontline.” He’s an award-winning journalist who has produced smart reports on topic ranging from the hunt for Osama bin Laden to Hurricane Katrina to climate change to the Wall Street meltdown. And he’s 65 years old. And his 401(k) is underfunded, according to his own reporting, by about half a million dollars.

In an online chat following the broadcast of “The Retirement Gamble,” Smith acknowledged that he “messed up” by raiding his retirement savings to pay for his kids’ educations. (And in the program, he mentioned a divorce, which is an underappreciated blow to long-term financial planning.)

So even smart people with comfortable incomes can make fundamental errors for which the 401(k) system is brutally unforgiving: not starting early enough, not saving enough, not saving consistently, being too conservative or too fickle in investment philosophy or, like Smith, trying to make retirement savings cover pre-retirement expenses. (According to the Investment Company Institute, an industry organization, 59 percent of 401(k) plans allow participants to borrow from their accounts, and 21 percent of participants who could borrow had loans outstanding at the end of 2011.)

Unlike the defined benefits plans that are now only available to government employees and a few lucky (generally older) employees of very large corporations, 401(k)s are “self-directed.” That sounds great, until you realize that it means excellent investment decisions must be made by people who were trained as journalists or nurses or civil engineers or construction workers or truck drivers. And if we don’t do a good job of it, we alone bear the responsibility and the consequences. (As “Frontline” pointed out, many of the professionals who are making money off the 401(k) industry have no fiduciary responsibility to the participants’ best interest. However, employers who choose those professionals do.)

The standard answer for (and from) the ill-prepared for retirement is “just work longer.” But that’s simplistic in the extreme. Many people are not physically able to work longer; others are not allowed to. And our economy has become dependent upon constantly churning older employees out in order to make room for the new crop. The retirement industry depends upon financially secure consumers who are no longer part of the workforce.

I do have some quibbles with Smith’s reporting. For one thing, he made much of the many fees paid to mysterious middlemen, but he barely mentioned the fee disclosure requirements that took effect last year. (These are called 408(b)(2) and 404(a)(5), if you want to do some Googling.) They were long overdue, of course, since 401(k)s are one of the biggest purchases some of us make, yet most of us had little idea what we were paying and even less idea what we should be paying. But the fact that these fees are now quantifiable deserved more attention than it got in the “Frontline” report.

I also thought the report seemed like a veiled advertisement for The Vanguard Group and its founder, John C. Bogle, who was given a lot of time to push his theories on index funds.

Another weakness of the report was this: It doesn’t suggest a solution. But since I don’t have one either, I won’t be too critical of that.

Gwen Moritz is editor of Arkansas Business. Email her at