Fees take 66 percent of retirement money!

It’s doubtful you are as nerdy as me and watch PBS Frontline. However, I encourage everyone to watch the program titled The Retirement Gamble that aired April 23 (it’s easy to find online). This show is one of the best I’ve seen that exposes many of the hidden shenanigans the financial industry pulls over middle-class America to earn a profit.

The Frontline program is organized into three general topics which can be described as:

1) Retirement planning is confusing.

2) Employer savings plans are full of fees.

3) There is no standard regulation for financial advisers.

Retirement planning is confusing

Planning for retirement has fallen solely on each individual. Without pensions, people need to determine how much to save, where to invest, and how to properly withdraw those funds in retirement. The vast majority of Americans are ignoring this responsibility because it is simply too overwhelming.

Employer savings plans are full of fees

This is the middle part of the show and it is shocking. Frontline investigates how 401(k) plans have many hidden fees. There are mutual fund expense ratios, management fees, admin. fees, trading fees and kickbacks to brokers.

Assume all of these fees total 2 percent of your account balance. That doesn’t seem like much. However, a 2 percent fee will eat away 66 percent of your account balance during 50 years!

Most of the 401(k) fees can be found in the mutual fund expense ratio. Actively-managed mutual funds try to beat the market and have high fees. Index mutual funds match the market return and have low fees. The program explains there is no research showing an actively-managed fund outperforms the less expensive index fund. Re-read that sentence to fully understand its impact.

No standard regulation for financial advisers

Anyone can call themselves a financial adviser, wealth manager or any kind of important sounding title. There is no regulation to it. There are a few methods, or “standards”, that financial professionals operate under.

The more common method is called the “suitability standard.” The suitability standard does not require the client’s best interest come first. Or another way of saying it, the adviser can make recommendations that will earn him the largest commission, rather than make the recommendation that is best for the client.

The less common method is the “fiduciary standard,” which only 15 percent of financial advisers follow. The fiduciary standard legally obligates the financial adviser to only make recommendations that are in the client’s best interest. Which standard would you like your financial adviser to operate under?

Solutions for all

The program does not have a typical Hollywood feel-good ending. That’s my one complaint about The Retirement Gamble. I like happy endings! Here are my suggestions to take control of your retirement plan:

1) Start saving at least 10 percent of your pay, and try to save 15 percent to 20 percent if possible.

2) In your 401(k), try to choose index funds with low expense ratios (below 0.50 percent is good).

3) Check your employer plan rating at BrightScope.com and use BrightScope’s tools to become an activist to get your employer to lower 401(k) fees.

4) Ask your financial adviser if they are a fiduciary acting in your best interests at all times. If not, then find a fiduciary financial planner at NAPFA.org.

Steve Doster is a Certified Financial Planner™ professional providing commission-free financial advice for do-it-yourself investors. You can reach Steve at Doster Financial Planning by phone 619-688-1192 or email steve@dosterfinancialplanning.com. You can also follow Steve on Facebook, Linked In, Twitter, or blog to get more personal finance advice and tips.