Exclusive Interview: Frontline Producer Explains Controversial 401k Documentary – The Bad
(This is the second installment in a series of four articles.)
When producer Martin Smith put together his Frontline documentary “The Retirement Gamble,” he wanted to shock typical 401k investors out of their complacency. He succeeded in doing that, but at what price? Many believe it was important to begin to expose the conflicts-of-interest in the 401k industry and how non-fiduciary service providers often sell investment products at inflated prices. Smith’s piece certainly achieved that aim.
Others in the industry, though, believe the show came up short, and perhaps didn’t focus on the right issues. Holmes Osborne, Principal at Osborne Global Investors in Kansas City, Missouri, felt it was controversial to blame Wall Street. “Plan administrators do not spend time shopping plans,” he said. “They are (often times) happy with mediocre plans and do not want to switch.” He also said the show lagged because “It didn’t quite explain how little the average person knows about investing and that a good advisor can add value (at the right price).”
One major problem was the general tone of the program. In going for the “shock” of drama, some believe Smith may have diluted his message. Hilary Martin, 401k Plan Advisor at The Family Wealth Consulting Group in Silicon Valley, California, said, “It’s a mistake to relate to employers as if they are responsible for our financial futures, or as if they have wronged us by folding up their pension plans. It’s a victim mentality that has zero positive impact and ‘The Retirement Gamble’ leans too heavily on that drama.”
Martin also takes a stab at Smith’s own mea culpa that aired with the Frontline segment, bringing into question whether someone who couldn’t get their own 401k plan right might not be the best person to ask to put together a documentary on the 401k industry. “Smith goes on record as saying that he doesn’t have enough money to retire, and he is seen with his head in his hands as his advisor tells him that he can’t retire until age 70, but must work part-time until age 75. He reveals facts that tell us clearly that he didn’t plan for retirement! He dipped into his retirement savings several times, and it says he paid for his kids’ college education and now can’t afford to retire. This is a straight-forward case of someone who had a good income, but didn’t plan for the long-term. This is the harsh reality we all live in, and I think responsible journalism should point this out to people. We alone are responsible for our financial health.”
Smith explained to FiduciaryNews.com the truth behind his personal situation. In fact, his experience isn’t that different from many small business owners. “Typically of people in my situation,” he said, “we’re concentrating on work, not the 401k plan.” He was advised by a non-fiduciary to do several things that, he admits, in retrospect, were wrong. Chief among these wrongs was taking a loan out of his 401k to pay for his children’s education. But it’s inaccurate to accuse him of not planning. At each step, he followed the advice of a financial professional he trusted. Add to that a divorce in which he lost a significant amount of his retirement savings, and you can understand the dilemma Smith is now in.
In fact, if not for a sense of maintaining journalistic objectivity, Smith could have made the entire show about his own personal plight. In many ways, he’s a poster child for what is wrong with the 401k business. He didn’t have a fiduciary advising him on his 401k (and still doesn’t, although he’s looking into changing that). “It seems backwards that my plan advisor would not be a fiduciary. When I signed up for the plan I didn’t know as much as I do now,” Smith concedes.
Unfortunately, it’s possible his personal experience may have unduly influenced the editorial decisions he made when constructing the documentary. “The tone of the whole show definitely seemed to have a preconceived bias against 401k and similar plans,” said Roger Wohlner, a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Illinois. “While certainly there are many folks having issues like those portrayed, they didn’t portray anyone who used their retirement plan to build a substantial nest egg. I have many clients in this situation. They also didn’t highlight what a good, low cost plan looks like, again many advisers likely have several plan sponsor clients [Smith] could have used.” (For more positive 401k stories, see “Plan Sponsors Smile: Hooray for the 401k!” FiduciaryNews.com, November 22, 2011.)
Smith countered he felt they did have a representative group of employees and that, after all, he said “the purpose of the program was to alert people, to get them more informed,” and that requires some “shock” in the way the show was laid out.
But it was precisely the way the show was laid out that drew complaints. Tim Wochok, Retirement Plan Consultant at Loring Ward in San Jose, California, felt the fiduciary issue, consigned to merely the last ten minutes of the 53 minute show, could have been emphasized more. “Fiduciary standards have remained a hot topic in the financial services industry since the financial crisis; therefore, I found the comments made by Michael Falcon of JP Morgan on this topic startling,” said Wochok. “He claimed that holding an advisor to a fiduciary standard was different — not better — than holding an advisor to a suitability standard from a client’s perspective. Furthermore, he claimed the preference for one or the other could be made upon a client’s personal needs, appetite for risk, and how much of the investment decision they want to delegate. Under a fiduciary standard an advisor is required to understand personal needs, appetite for risk and make recommendations based upon the client’s best interest first. Under the suitability rule, the advisor has to reasonably believe that any recommendations made are suitable for client needs; however that does not carry a duty to fulfill the client’s best interest first, creating a potential conflict of interest.”
Smith pointed out the placement of the fiduciary issue at the end of the broadcast follows standard documentary procedures where matters of public policy are discussed last. “You usually put Washington’s activities towards the end of the broadcast,” said Smith. He continued, “We don’t think the fiduciary issue will necessary address all these issues. My role as a general reporter is to highlight that the Obama administration believes this will solve the problem. It’s not clear what the final consequence will be. If someone is a fiduciary, that would seem to be better.” Contrary to his statement “It seems backwards that my plan advisor would not be a fiduciary,” and although he admires what Phyllis Borzi is doing at the DOL, Smith remains unconvinced that merely beefing up the Fiduciary Rule will solve the problem with fees.
Yet the documentary’s consistent use of the term “mutual fund fees” may have been more of a disservice (see “401k Plan Sponsors and the Mutual Fund Expense Ratio Wild Goose Chase,” FiduciaryNews.com, July 3, 2012). In fact, of all the fees associated with 401k plans, mutual fund fees have been the most transparent. When told the issue of high fees really pertains mostly to plans like his, we asked Smith if he was aware of Multiple Employer Plans (see “Experts Sound Off on DOL’s 401k MEP Advisory Opinion,” FiduciaryNews.com, June 12, 2012). His Associate Producer Ryan Knutson said he knew of MEPs “a little, but not that much” and implied it might have been worth it to have looked more into them as an option.
And now this is where things start to turn ugly. When getting into the nitty gritty of fees, it turns out Smith had conducted interviews with both objective sources and controversial (some would even say “discredited”) sources. Both could provide useful evidence to prove his point. But one would be less scintillating while the other might become an unnecessary distraction. Which road did Smith choose? We reveal this in our next installment.
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