(October 12, 2007) A Nation on the Precipice: Our Failed Retirement System |
A full-page insurance company advertisement in a financial
newspaper today read, "Bald, helpless and broke is how to
start life. Not finish it." The ad went on to warn that
many people have a rosy view of their retirement savings
believing they will be able to live off their pension, home
equity and Social Security. The solution proposed is to
invest more of your retirement savings in annuities and
other insurance company investment products. We can't
conceive of plan more likely to result in investors ending
up "bald, broke and helpless" than pouring retirement
savings into high cost, poor performing insurance company
variable and fixed annuities and mutual funds. As we
testified before the Senate Banking Committee in 2004:
"The entire investment return attributable to an individual's retirement account over a lifetime may be eaten away by excessive fees and other malfeasance. While excessive fees of one percent or more may seem insignificant, when compounded over an investor's lifetime, they may reduce a retiree's nest egg by more than 50%. Many investors straddled with fees exceeding three percent may be lucky to find even their principal intact when it comes time to retire. Others appear doomed to join the ranks of the impoverished elderly, bagging groceries to make ends meet."
This nation stands before a precipice. Our population of impoverished elderly is on the verge of exploding. That may sound alarmist but upon close examination, one can see it already happening (especially in parts of the country such as Florida, where we're located) and once you consider the powerful forces converging (discussed below), it seems inevitable. The first four factors have been discussed in pension publications extensively and in the national press to some degree.
Baby boomers are approaching retirement age and the number of Americans above age 55 is about to swell. The huge demographic shift is already putting enormous pressure on the economy and this pressure will only grow in the next twenty years. What will become of all of these people? Will they be able to afford to retire? Will they be able to find jobs to provide for their living expenses into their sixties and seventies and eighties? Will they be unable for health reasons to continue to work long before they can afford to retire? We can already see that many, many of the aging baby boomers, either poor, unskilled, unhealthy or some combination of the three, appear doomed.
Concurrent with this demographic shift, traditional defined benefit pensions are disappearing or (as in the automotive industry) are being pared back. Promises that American businesses made to workers that enabled some of these corporations to enjoy decades of monopolistic prosperity are now being unwound. The consensus today seems to be that workers pushed these companies too far- to the brink of bankruptcy. How many times have we heard that for every car General Motors sells, thousands of dollars must go to honor retirement obligations? Is it possible that automotive company managements should have anticipated these problems, been more innovative and quality conscious over the last 50 years when they dominated the global market for automobiles? Regardless of the fact that the fault clearly lies with management failing to plan prudently, workers will pay the price by surrendering pension benefits in order to enable these companies to survive. In addition to the abandonment or paring back of defined benefit pension commitments, obligations to fund retiree health care costs are falling by the wayside. This means that many retirees with pensions will have to search for individual health insurance coverage (which may be difficult for many with pre-existing conditions to secure), as well as pay the greater costs involved in non-group plans.
The next factor leading us to the precipice is being hotly debated (as well as litigated) in the retirement planning community. Defined contribution retirement plans, in addition to shifting responsibility for investment decision-making onto workers, almost always force workers into higher cost, poorer performing retail oriented investment options. It is indisputable that defined contribution plans substantially underperform defined benefit plans. The debate surrounds who's to blame for this. The investment community would like to convince regulators and the public that it's poor decision- making on the part of participants. The solution according to the money management industry is further guidance, involving additional costs, by the industry. The money management industry would have you believe that if you increase the amount of fees you pay them, performance will improve. Our forensic investigations reveal that many retirement products are so poorly constructed and managed that it is virtually inconceivable that the investor's assets will grow over time (in some cases, despite even additions to principal). The investment performance shortfall between defined contribution and defined benefit plans cannot be blamed entirely upon participants.
The inescapable conclusion is that defined contribution plans have failed to achieve their goal of providing retirement security for our nation's workers. When one considers the paltry average amounts that Americans have accumulated in their defined contribution plans, it is absurd to pretend that these funds will provide for more than a year or two of full retirement at best.
Declining home prices and evaporating home equity is a huge issue, the implications of which upon our growing population of retirees have not been fully appreciated, largely because the financial pundits continue to assure us that the worst either is already or soon will be, behind us. According to Fox News, the "credit crunch" was over a week ago. Forensic experts know that the questionable lending practices involved with many securitized mortgage products and the related valuation abuses have only begun to surface and, due to financial reporting scheduling, will have greater impact in the final quarter of this year and well into next year. If home prices continue to deteriorate and do not fully recover for perhaps a decade, how many retirees will deplete their equity in the interim and be forced in foreclosure? Where will they live once evicted from their homes?
Related to the issue of declining home prices is the level of high interest personal debt most Americans will carry with them into retirement. While home values may continue to decline, credit card debt should grow more rapidly in the future due to the interest rates such cards carry and growing inability to pay off balances through home equity lines of credit.
Our national obesity epidemic will also profoundly impact upon the financial security of Americans nearing retirement. Aging Baby Boomers will likely enter retirement in worse health than their parents. Will they have health insurance? Will they be able to afford such insurance? Will they be able to work? Given that the majority of adult Americans are overweight and a third are obese, it seems likely that more retirement age individuals will be unable to work for health reasons than can afford to retire. What will happen to these unemployed, unhealthy older individuals (age 55+)?
Here in Florida we are accustomed to seeing older (and elderly) persons bagging our groceries, serving us coffee at Starbucks and performing other tasks that once were performed by young persons still in school or just entering the workforce. These older persons need income and health care coverage in "retirement" and they are healthy enough to continue to work. They are not helpless-at least not yet. But the number of people who in retirement find themselves "bald, helpless and broke" is going to surprise us all. It will be a far greater number than anyone in Washington has anticipated. Perhaps through recognizing the powerful forces that have led us to this point and the severity of the problem we have created and will soon encounter full-force, we can fashion a response to our national failure to provide financial security for our elders. One thing is clear: chastising older workers to save more and increase their equity asset allocations (or, God forbid, purchase high cost, poor performing insurance company annuities) will not at this point in their careers provide them with the retirement funds they will need.
SEC Commissioners Wanted: Plaintiffs Lawyers and Consumer Advocates Need Not Apply
According to the SEC's website, "Congress established the Securities and Exchange Commission in 1934 to enforce the newly-passed securities laws, to promote stability in the markets and, most importantly, to protect investors." Fresh out of law school and working as a young attorney with the SEC in Washington 25 years ago, I remember being inspired by the words "protection of investors." I believe it was the agency's "tagline" at the time. It was our mission.
The Commission which oversees the agency consists of five presidentially-appointed Commissioners, with staggered five-year terms. One of them is designated by the President as Chairman of the Commission - the agency's chief executive. By law, no more than three of the Commissioners may belong to the same political party, ensuring non- partisanship. Other than a presidential appointment, remarkably there are no background educational or professional qualifications to become a Commissioner. Given the importance of the position, one would assume that some serious thought would have gone into the question of what training or experience prepares a person to be a credible investor protection advocate.
When you examine the persons who have been appointed as Commissioners in the past, a clear pattern emerges. Generally they have come from the ranks of investment bankers and lawyers who have spent their entire professional careers representing securities firms and publicly held corporations. These are people who have prospered from sales of investment products to investors, as opposed to recovering monies on behalf of defrauded investors. They know absolutely nothing about the challenges investors face every day in seeking fair treatment in their dealings in the securities markets. Every now and then an academic gets thrown into the mix. But one thing is clear: Plaintiff or class action securities lawyers are not welcome. To even suggest that such lawyers should serve on the Commission is considered absurd. Heresy! Conventional wisdom in Washington is that plaintiff securities lawyers are a rogue bunch. They are regarded as being as unscrupulous as the most notorious boiler room operators. To allow them to contribute to the regulatory decision-making process would be preposterous. I believe there is also a sense of fear that the Commission would be exposed if a plaintiff securities lawyer was allowed to witness firsthand the backroom pressures the regulated bring upon the agency and the compromises that result. A true investor advocate would be outraged; industry insiders, on the other hand, know well how to characterize schemes designed to benefit the investment community as being in the investing public's best interest.
Never in the history of the Commission has a person with substantial experience recovering monies for investors or protecting investors been allowed to serve as a commissioner. This lack of diversity of opinion is a shame and, I believe, is a significant factor in explaining why the agency has lost so much of the credibility it once enjoyed.
The Commission should, to achieve balance and a new sense of direction, have members who question many of the compromises the SEC has made in recent years. For example, self regulation of the brokerage industry should be reexamined. The brokerage industry knows the American public no longer believes self-regulation works. It's noteworthy that FINRA, the new securities industry self-regulatory organization, no longer characterizes itself as an SRO. Now it calls itself "the largest non-governmental regulator for all securities firms in the United States." What the hell is a non-governmental regulator? I guess FINRA decided it sounded more legitimate than "self-regulator." We need Commissioners who question whether mandatory arbitration is in the public interest. For years the securities industry has promoted and defended mandatory arbitration as being best for investors, as opposed to offering protection to the securities industry. If investors gain and the securities industry looses as a result of mandatory arbitration, then why is the industry so adamant about it? Why does it have to be mandatory? Ask any lawyer who has represented investors in industry arbitrations or an investor if the arbitration system is preferable to a court of law. There is overwhelming evidence that industry arbitration is not fair to investors. The conflict-of-interest-ridden mutual fund regulatory scheme needs a complete overhaul. Let's shorten mutual fund prospectuses to simply state, "The fund is created and controlled by and operated primarily for the benefit of the adviser." Currently mutual fund prospectuses lead investors to believe that the conflicts of interest inherent in the mutual fund regulatory scheme have been effectively eliminated. Soft dollar and proprietary trading, securities lending, foreign exchange and custody arrangements are additional issues in need of review.
If we're going to stack the deck in favor of the securities industry and not allow persons with substantial investor protection credentials to have a voice at the Commission, let's be honest about it. Like Country Clubs that exclude minorities and women, let's put it in the charter: "Those people (plaintiff lawyers and investor advocates) are not welcome here." Let's stop misleading investors into believing the SEC's primary mission is investor protection.