Salient to Investors:

Americans are facing a retirement  crisis. Half say they can’t afford to save for retirement, while one-third say they have no retirement funds.

Brooks Hamilton says you will need 10 to 15 times your income at retirement to be OK, which means you have to save more, and get serious about funding early and not wait until you are in your 40s.

60 million Americans have company 401(k) plans. Author Helaine Olen said the 401(k) started in the late 1970s and early 1980s as a tax dodge for high earners and no-one ever thought it would apply to the rest of us.

Teresa Ghilarducci at The New School said 401(k)s are one of the only products Americans buy that they don’t know the price of, the quality of, and the danger of – because the mutual fund industry has protected itself against regulation that would expose the dangers and price of their products. Ghilarducci said basically your advisor is out for himself and to maximise his sales and the way to do that is to be loyal to the mutual fund and try to sell you the most profitable products.

Zvi Bodie said 401(k)s place the burden of retirement income planning on the participants and the vast majority of ordinary people don’t know how to do that. Bodie said you are not getting superior performance for paying fund fees and there is no scientific evidence that mutual funds outperform a simple strategy of holding a market index, and broker-dealers are not fiduciaries and under no obligation to put you into the best investment, and just need to meet a suitability standard.

Ron Lieber at the New York Times said the mutual funds made themselves the very foundation of the 401(k) plan. Lieber says that the best way to find out if the person trying to sell you a financial product is really a salesman is to ask them if they are willing to sign a pledge that says they will act as a fiduciary at all times with all products – if they won’t, walk away.

In 2008, the year the market crashed, Wall Street paid out $18 billion dollars in bonuses.

The average actively managed mutual fund carries annual expense of 1.3%, some funds charge 2 percent and others as much as 5 percent. Ron Lieber said those expenses can add up over the fund lifetime to well in the six figures and be the difference between running our of money in retirement and having some left over to pass on to heirs.

Jason Zweig at the Wall Street Journal said many 401(k) plans are lousy: their funds choice sucks, fund fees are outlandishly high – often a person can be paying 10 times as much to invest in a 401(k) as his or her neighbor. Zweig the evidence of the last 25 years is that all else being equal, you should always buy the cheaper fund, and said one of the ultimate dirty secrets of the fund industry is that many people who run other fund companies own index funds in their own accounts.

Jack Bogle at Vanguard said the management company wanting more fees is natural for most businesses but not for this business, and  recommends minimizing Wall Street’s take. Bogle said that assuming a fund’s gross return is 7%, an annual fee of 2% annual fee over 50 years results in 2/3 of the fund’s gains are lost – the tyranny of compounding costs. Bogle says the  investor puts up 100 percent of the capital, takes 100 percent of the risk, yet gets only 33 percent of the return. Bogle says indexing is the only way to invest in American business because you have only a 1 percent chance of beating the market over time.

Bogle says the system is almost rigged against human psychology that says something that has done well in the past will do well in the future is categorically false – there is a high likelihood that a fund at the peak is likely to go down in the valley.

Most investors are unaware of all the types of fees they are paying. Mutual funds rely on brokers and plan administrators to get onto the 401(k) plan menu and pays them a revenue sharing fee – a legal kickback which is not paid by the fund company, but by the participant. Bogle says these payments are part of the system.

Robert Hiltonsmith said the 401(k) industry is not built to benefit the plan participants and that there is no incentive for the industry to change.

Studies over various time periods and in bull and bear markets repeatedly show that actively managed funds fail to beat index funds. Hot funds are loved by the financial media and tempt investors.

There are no standards on who can give advice to retirement plans. The Bureau of Labor, which regulates employee retirement plans, says anyone can hold themselves out to be an expert, a financial advisor, retirement planner, financial planner, etc.

Helaine Olen says the term financial advisor means almost nothing and could mean a financial planner or a broker who is really a salesman. Registered investment advisors are fiduciaries and required by law to act in their client’s best interest.  But the vast majority of so-called advisors, some 85% are not fiduciaries but merely brokers or salesman.

The financial services industry lobbied to get the Department of Labor to withdraw its fiduciary rule proposal, made in the fall of 2010, that required all financial advisors to put their clients interests before their own when dealing with retirement accounts.

Over $10 trillion has been given to the financial services industry in the past two decades.

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