This past spring, John Oliver did a spot on retirement plans on his program Last Week Tonight with John Oliver. The video has been viewed over 4.4 million times on YouTube. A few friends have sent it my way asking me what I thought. Well first, it’s hilarious, so if you haven’t seen it yet, enjoy. He brings up some very serious issues in the financial services industry in general, and in the retirement plan industry specifically. He hits the nail right on the head in many ways, but he does leave the wrong impression in a few.
His first salvo was targeted at financial advisers. It is true, the term financial adviser has about as much meaning as the label “all natural”. Anyone can call themselves a financial adviser. There are very few barriers to entry for providing financial advice. For example, here in Oregon, if you have $300 and can pass the series 65 exam, which covers investment basics and regulations, you can be a state registered investment adviser. Registered investment advisers are fiduciaries by law, as Oliver recommends, but that doesn’t mean they are competent.
For most people, if you are seeking investment advice, look for someone with the Certified Financial Planner (CFP) designation. These individuals must show competency in eight topic areas, pass the comprehensive CFP exam, present a financial plan for review and have three years of related work experience before they can use the designation. These advisers can help you plan for your financial future as well as invest for it. Another group of advisers to consider are those with the Chartered Financial Analyst (CFA) designation. These individuals tend to be more focused on the investment side, but also have very rigorous testing and experience requirements.
Next Oliver took on high fees. Every cent of fees you pay is investment earnings you don’t get to keep, and high fees do take a toll on your savings. In a company sponsored retirement plan, there are two broad categories of fees. There are the fees associated with making the plan work, called administrative fees, and there are the fees charged by the mutual fund companies for managing your investment options.
The first set of fees are out of your hands. Your company selected the plan, and hopefully made the best deal possible. Unfortunately, for small plans, such as the one for the staff of Last Week Tonight, high administrative fees are difficult to avoid. Few retirement plan providers work with small and start up plans. It’s just really hard for companies to make a profit on plans that don’t already have large balances. Part of the fees typically do get paid to a middle man who acts as a sales person for the company providing the retirement plan. Unfortunately too many of these financial advisers do very little to earn their keep, but for those who do, they can be a tremendous resource for the employer and the employees participating in the plan.
If you work for a large employer, administrative fees are usually low. These companies can demand high levels of service and low fees because the retirement plan providers want to work with them. There are certain fixed costs to administering retirement plans, regardless of the size, and large plans cover these costs and more. That means the retirement plan provider makes a profit even at lower fee percentages.
The fees that you can control are those on the investments. You can minimize them by choosing low cost index mutual funds, just as Oliver recommends. Actively managed mutual funds have higher fees, and often don’t have better performance. The term active means that they are managing the fund in a way that they believe will perform better than market indices, like the S&P 500. In order to perform better, they have to invest differently, and sometimes (actually pretty often) that means they perform worse.
One exception that I make to the advice to invest in only low cost index mutual funds is when target date retirement funds are on offer. Oliver’s staff aren’t the only ones who would prefer to google tea cup pig antics over paying attention to their retirement plan investments. For most people, it’s worthwhile to get the broad diversification and automatic adjustment in portfolio risk that comes with target date retirement funds, even at the cost of higher fees. If your plan offers these, and more than 70 percent of plans do, simply pick the one with the year in the title that is closest to your most likely retirement year. For more information on target date retirement funds, see this post.
Oliver’s video closes with five things to do in order to successfully invest for retirement, and they are right on the money. Start saving early. Choose low cost index mutual funds. If you work with an adviser, choose one who is a fiduciary, and I recommend that you choose one with the CFP designation. Gradually shift your investments from stocks to bonds as you get older. In order to do this automatically, it may be worthwhile to choose a target date retirement fund, even if it is not an index mutual fund. Finally keep your fees as low as you can.
Oliver’s experience with his retirement plan wasn’t good, and it might leave the impression that you should be wary of investing in your own company’s plan. Company sponsored retirement plans offer many benefits including higher limits on tax deferred savings than on individual retirement accounts, and in many cases, a company match for your savings. If you are questioning whether you should participate in your company’s plan, the answer is simply, yes.
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