The financial industry is a creature of government regulation, but a lot more statism would be required to make it serve in the interest of the median saver. Matt Yglesias explains some problems in the 401(k) industry:
- Poor people get absolutely nothing.
- Wealthy people who would have had large savings anyway get a nice tax cut that offers no meaningful incentive effect.
- For people in the middle, the quantity of subsidy you receive is linked to the marginal tax rate you pay—in other words it's inverse to need.
- A small minority of middle class people manage to file the paperwork to save an adequate amount and then select a prudent low-fee broadly diversified fund as their savings vehicle.
- Most middle class savers end up either undersaving, overtrading, investing in excessively high-fee vehicles or some combination of the three.
- A small number of highly compensated folks now have lucrative careers offering bad investment products to a middle class mass market based on their ability to swindle people.
...it's simply a fact that a great number of 401(k) funds are extremely poorly suited as retirement vehicles and suck up far more in fees than can possibly be justified.In addition, most people don't save enough anyhow on their own volition, so some kind of forced savings (or taxation) is the only way to keep the majority of elderly out of poverty. The only way to prevent widespread poverty among the elderly is some kind of paternalism. But market-based paternalism figures out ways to exploit the vulnerable rather than protect them.
But the news is even worse than that! Last year the Labor Department issued new rules that forced funds to disclose their fees in an easily understood manner. The idea was that if they're going to rip you off, at least now you'll know how much they're ripping you off and maybe switch to a more honest fund. But it didn't do much good:
After the new fee disclosure statements went out, roughly the same percentage—half!—of participants said that they still do not know how much they pay in plan annual fees and expenses, according to a recent survey by LIMRA, an association of insurance and financial services organizations.Basically, this suggests that people have no idea what "fees" even means, which bodes ill for the power of disclosure to have any effect. If you think that 2 percent is really low, then you're getting ripped off even though you do know the fee structure of your fund.
....For those 401(k) participants who said they thought they knew how much they paid in fees, most of them were way off base. One out of four participants thought they paid 25% or more in fees, 16% thought they paid between 10% to 24% in fees, and 30% thought they paid between 2% and 9% in fees. Only 28% of participants thought their fees were less than 2%.
That group is the closest to reality. On average fees and expenses range between 1 to 2 percent, depending on the size of the plan (how many employees are covered) and the employees’ allocation choices (index funds versus actively managed funds), says LIMRA.
The era of the defined-benefit corporate pension is gone, and it's not coming back. People switch jobs too frequently for it to work anyway. The only real options are either private plans like 401(k)s, which ought to be reformed to make them better, more honest retirement vehicles, or higher Social Security payments. Most likely, both. The former would help the middle class and the latter would help the poor and the working class. The upper middle class and the wealthy can fend for themselves. They're doing pretty well already.
