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PBS ‘Retirement Gamble’ Documentary Draws Mixed Industry Response
Old 04-25-2013, 06:09 PM   #1
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PBS ‘Retirement Gamble’ Documentary Draws Mixed Industry Response

Rather than piggybacking this story on the previous thread about the show, I'm starting a new one post viewing of the PBS show. Looks like the "industry" feels the sting.

Quote:
Brian Graff, executive director and CEO of The American Society of Pension Professionals & Actuaries, issued a statement on Wednesday saying the documentary “conveniently ignores” how difficult it is to make workers into savers.
The problem, Graff wrote, is that the documentary relied on data from a study published by Demos, a liberal think tank, in May that ASPPA “debunked” for overstating typical mutual fund fees in 401(k) plans. “What is more troubling, however, is Frontline’s take that fees are by far the most important factor to be considered when choosing an investment, and the retirement industry offers participants little value. In other words, that the industry is nothing more than a commodity,” Graff wrote.
For retirement plans to be successful, according to Graff, employers, advisors and participants all have to work together to make decisions regarding plan design, benefits and investment choices. The service that entails comes at a price, but Graff stressed that price should never be the only consideration in a plan. “If you were having trouble with the law, would you simply look for the cheapest lawyer? Certainly not. For something as important as retirement savings, you should not base your decision solely on cost either.”
Then there's this side...
Quote:
The National Association of Personal Financial Advisors also issued a statement on Wednesday in response to the documentary that was less critical of the line PBS took, calling it a “wake-up call for legislators and regulators to finally do something to protect American investors” and a “strong case for fee-only planning.”
NAPFA praised the documentary for putting a “spotlight on how commissions, hidden fees and expenses can devastate the average consumer’s retirement savings” and called for a fiduciary standard to protect investors.

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Old 04-25-2013, 06:14 PM   #2
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Old 04-25-2013, 07:03 PM   #3
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Having just watched it - and being a novice at these things - I do not understand the dichotomy (typical nowadays - and often used to create defensive tangential arguments ) that was stated by Mr Graff (above) in that the program overstated the issues on fees. I took 3 key messages from the program - 1) the influence of fees on the bottom-line, 2) that low fee funds that track broad indices do just as well as most high-fee managed funds, and 3) Regulatory agencies are in the back pocket of lobbists for the financial institutions that make big money from investors in these funds preventing transparency (typical).

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Old 04-26-2013, 07:26 AM   #4
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It was a good documentary. Bogle shined as the most credible voice in the show. A simple tweak that would help would be to mandate that all 401Ks offer a set of index funds and include prominent information about fees. The show mentioned that the law has changed requiring 401Ks to disclose fees but I haven't seen the results yet.
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Old 04-26-2013, 08:28 AM   #5
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I was a bit surprised at the weak defense of actively managed funds. Sure, all know that indexes perform better on average. But they would have sounded a bit less like a floundering fish if they had said any of the following:

- actively managed funds allow investors to invest in a particular segment of the market, such as agriculture or municipal bonds...
- some of our customers prefer actively managed funds... We like to provide options, which includes indexes too.
- some of our actively managed funds are geared towards certain retirement dates, which means we can adjust the risk as our clients get older. This is a valuable service.

Now, none of these points would have changed my mind.... But they seem like better responses than we saw in the program. Unless Frontline edited all the points except for them looking uncomfortable.

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Old 04-26-2013, 09:16 AM   #6
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I use index funds almost exclusively but there is an aspect to active fund total return that I have never fully understood. Years back when evaluating funds on Morningstar someone here (I believe) indicated that the total returns numbers accounted for expenses (i.e. the returns posted were after expenses, not before) I have assumed that when people say indexes beat 70-80% of active funds, that also includes fees. If so, the PBS show would be misleading because the fees would not have a dramatic impact vs an index fund as an alternate. It would also indicate that active managers might be better at picking stocks/timing markets but then lost all the ground they gained to the expenses.

Does anyone know for sure what the reality is?
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Old 04-26-2013, 09:26 AM   #7
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This was in the Detroit Free Press:

Quote:
The “Frontline” piece, which ran Tuesday, took a hard look at how 401(k) savings are falling short for many people. The risks fall on the saver. One expert pointed out that the 401(k) is one of the only products that Americans buy but do not know the price of it.
....
But think about it. Your best friend could be paying far more than you for food or shoes or vacations. We’re not one-price-fits-all consumers.

But we do seem to pay far more attention to the prices listed for milk and movie tickets than we do to the fees associated with the mutual funds we select for our 401(k) plans.
This Frontline piece is generating lots of buzz, even around my office water cooler.
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Old 04-26-2013, 02:53 PM   #8
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Originally Posted by donheff View Post
I use index funds almost exclusively but there is an aspect to active fund total return that I have never fully understood. Years back when evaluating funds on Morningstar someone here (I believe) indicated that the total returns numbers accounted for expenses (i.e. the returns posted were after expenses, not before) I have assumed that when people say indexes beat 70-80% of active funds, that also includes fees. If so, the PBS show would be misleading because the fees would not have a dramatic impact vs an index fund as an alternate. It would also indicate that active managers might be better at picking stocks/timing markets but then lost all the ground they gained to the expenses.

Does anyone know for sure what the reality is?
An "index" (like the S&P 500) does not include fees. An "index fund" or any other mutual fund/ETF does include fees. So an index fund usually misses its index performance by the amount of its fees. Though there are ways to cheat and make up some of the expenses.
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Old 04-26-2013, 07:04 PM   #9
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Originally Posted by Animorph View Post
An "index" (like the S&P 500) does not include fees. An "index fund" or any other mutual fund/ETF does include fees. So an index fund usually misses its index performance by the amount of its fees. Though there are ways to cheat and make up some of the expenses.
My question is different. Index funds are reported to beat managed funds by a small margin in 70% of cases. If this is based on total gains including fees (my assumption) then they are an OK investment - in the top third of competing funds. In that case the worries about active fees eating investors lunch are over stated because total gains after expenses is what counts. I am simply interested in whether my assumption about how performance is reported is accurate.
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Old 04-26-2013, 09:17 PM   #10
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Originally Posted by donheff View Post
My question is different. Index funds are reported to beat managed funds by a small margin in 70% of cases. If this is based on total gains including fees (my assumption) then they are an OK investment - in the top third of competing funds. In that case the worries about active fees eating investors lunch are over stated because total gains after expenses is what counts. I am simply interested in whether my assumption about how performance is reported is accurate.
All perfomance numbers are net of fees, so I think your answer is yes.

The problem is that tricky little part about the past not predicting the future. The current manager may not be the one who racked up the nice past record. The current manager may retire in a few years and leave you with who knows who. The past performance may have been 10 mediocre years and one great decision during 2008-2009.

Even in a 20 year period, I think a couple of good decisions at critical times (low on tech stocks in 2000, low on financials in 2008 for instance) might make a fund look like a winner. And if a 20 year record looks good and management was stable, will they be sticking around for another 20 years? No easy way to pick sure winners just looking at performance data.

I like to select active mutual funds from companies that have several different index-beating funds, use a team approach rather than a "star manager", have a low turnover, and yes, reasonably low fees. In addition to beating indexes over as long a time period as I can find data. I have had most of my active funds for at least five years now and I've been happy with them. I benchmark them to index funds just to be sure they are still doing OK, but still over long periods.
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Old 04-27-2013, 06:36 AM   #11
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Originally Posted by Animorph View Post
All perfomance numbers are net of fees, so I think your answer is yes.

The problem is that tricky little part about the past not predicting the future. The current manager may not be the one who racked up the nice past record. The current manager may retire in a few years and leave you with who knows who. The past performance may have been 10 mediocre years and one great decision during 2008-2009.

Even in a 20 year period, I think a couple of good decisions at critical times (low on tech stocks in 2000, low on financials in 2008 for instance) might make a fund look like a winner. And if a 20 year record looks good and management was stable, will they be sticking around for another 20 years? No easy way to pick sure winners just looking at performance data.

I like to select active mutual funds from companies that have several different index-beating funds, use a team approach rather than a "star manager", have a low turnover, and yes, reasonably low fees. In addition to beating indexes over as long a time period as I can find data. I have had most of my active funds for at least five years now and I've been happy with them. I benchmark them to index funds just to be sure they are still doing OK, but still over long periods.
Thanks Animorph. That is what I thought. I still prefer index funds primarily because I don't want to try to research active funds pursuing a likely wash or even small loss. But the PBS show added up the huge losses from expenses and implied (if it didn't outright state) that you have to subtract this huge amount of money relative to what you would get with index funds which is misleading. Of course, the brokers they asked to define the active funds didn't explain any of that which, in itself, is a cautionary tale about why not to turn to them.

The show did point to additional 401K plan administrative fees that can also chew up savings. These supposedly will have to be clearly disclosed under revised law. Those fees, which have generally been hidden from investors, affect all savings, passive and active.
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Old 04-27-2013, 07:43 AM   #12
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Old 04-27-2013, 08:31 AM   #13
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If you think retirement and investment fees are an issue for people in the US just thank your stars that you're not living in the UK as fees are even higher than in the US......or worse still a US citizen living in the UK. In the latter case US and UK tax rules make very difficult and expensive to invest in mutual funds. You have to be quite sophisticated to deal with the rules so most US citizens in the UK dont invest and if they do they often pay FAs and specialist fund providers fees of 2.5% to get into US and UK compliant portfolios.
Here's a typical manager's website. All the active management jargon and BS is amazing, and good luck finding anything about fees.

http://www.praemium.co.uk
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Old 04-27-2013, 09:24 AM   #14
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Originally Posted by donheff View Post
Thanks Animorph. That is what I thought. ...
In addition, any comparison needs to account for 'survivor bias'.

When you look at the actively managed funds today, and try to verify their long term performance (say 20 years), you have actually eliminated those actively managed funds that didn't survive the 20 year period. So the averages are worse than they appear. I've heard that poor performing funds are dropped or merged so the fund company's offerings don't include too many duds.

So you need to go back 20 years, grab that universe of funds, and measure going forward - but I don't think that is typically done, I think these studies usually start with the funds you could buy today and look backwards.

-ERD50
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Old 04-27-2013, 09:39 AM   #15
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In addition, any comparison needs to account for 'survivor bias'.

When you look at the actively managed funds today, and try to verify their long term performance (say 20 years), you have actually eliminated those actively managed funds that didn't survive the 20 year period. So the averages are worse than they appear. I've heard that poor performing funds are dropped or merged so the fund company's offerings don't include too many duds.

So you need to go back 20 years, grab that universe of funds, and measure going forward - but I don't think that is typically done, I think these studies usually start with the funds you could buy today and look backwards.

-ERD50
I've seen the returns from actively managed balance funds compared with single asset class indexes and any returns above the index attributed to the active management. Talk about comparing apples and oranges. Here's an example from theUK firm called London and Capital. Seems more like an argument for a balance AA rather than active management and the associated fees.

Quote:
Example
We can see that the London & Capital Global Strategies Model portfolio has outperformed the MSCI World Equity Index. We have used monetary values to demonstrate this even though, in practice, an investor cannot invest directly into the MSCI World index.

£ 500,000 invested in the Global Strategies Model Portfolio at the end of 1990 would have turned into £3,011,867 by the end 2011, a return of 606%.
Initial investment Valuation of investment Return
at 31/12/90 at 31/12/11
= £ 500,000 = £ 3,030,116 = 606%
£ 500,000 invested in the MSCI World Equity Index at the end of 1990 would have turned into £1,245,267 by the end of 2011, a return of 256%.
Initial investment Valuation of investment Return
at 31/12/90 at 31/12/11
= £ 500,000 = £ 1,281,162 = 256%
Outperformance 1990 – 2011 = £ 1,748,954
http://www.londonandcapital.com/docu...une-2012_1.pdf
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Old 04-27-2013, 10:27 AM   #16
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Honest question: if the universe of retirement plan funds were all moved to index funds, would the market still work properly? Or would these indexes move according the whim of a minority of traders?
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Old 04-27-2013, 11:05 AM   #17
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Honest question: if the universe of retirement plan funds were all moved to index funds, would the market still work properly? Or would these indexes move according the whim of a minority of traders?
I don't think it would affect the market. I believe if anything...it would even make the market more stable.

And for those that had to work and missed the Frontline when it aired, (I am one of them), here's the link to watching it on line...
The Retirement Gamble | FRONTLINE | PBS
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Old 04-27-2013, 11:55 AM   #18
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Old 04-27-2013, 01:46 PM   #19
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I don't think it would affect the market. I believe if anything...it would even make the market more stable.

And for those that had to work and missed the Frontline when it aired, (I am one of them), here's the link to watching it on line...
The Retirement Gamble | FRONTLINE | PBS

My understanding is that more and more people that rely on indexing the less number of people will be around to keep the indexes honest and the less stable the market will be.

As thought experiment, imagine if stock market consisted of exactly three people, indexers, Warren Buffett, and Bill Gross. Now as long as Buffett and Bill Gross disagree about a stock the market works but what happens both Buffett and Bill Gross decide the Apple is overpriced and sell it short.
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Old 04-27-2013, 01:54 PM   #20
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Originally Posted by mickeyd
MF VP "I don't want to second guess Jack Bogle"

Reporter "But you just did that"

MF VP "Yea, I guess I did"

~~~~~~~~~~

Now that's humerous TV viewing...
I like to see Prudential and JP Morgan VPs squirm as much as the next man, but you can do a lot with editing to convey a particular impression. I wonder how much of the answers Frontline left out. The show always has an agenda, and I usually agree with it, but you should always be skeptical and aware of the way the audience can be manipulated.
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