How the banksters looted your 401(k): "It's all about the fees, baby!"
Maybe I should buy a TV after all. CBS:
"The three-legged stool [of Social Security, retirement plans, and 401(k)], if you will, has gone to two legs and it's wobbly. And it's wobbling, and I'm not sure that it's gonna support anything. And that's the scary part and people are afraid," Brooks Hamilton, who has helped design retirement plans for some of the country's largest corporations, told [CBS correspondent Steve] Kroft.
When employers began turning 401(k)s into retirement plans, the financial community was not shy about promoting them as such. The prospect of trillions of dollars in the hands of unsophisticated investors opened the door for all sorts of potential abuses.
"The fact is that the typical 401(k) investor is a financial novice. They don't know a stock from a bond. And we give 'em a list of 20 or 30 mutual funds with really, really powerful names, you know, they sound like, 'Gee, that's where I want to have my money,'" Hamilton said,
"What are the, generally, the quality of the mutual funds in 401(k) plans?" Kroft asked.
"Mediocre," Hamilton replied. "I'm being real honest with you, with half the funds on the list really dogs, what people would characterize as dogs shouldn't be on the list to start with."
"There clearly has been a raid on these funds by the people of Wall Street. And it's cost the savers and the future retirees a lot of money that would otherwise be in their account, independent of the financial collapse," Rep. George Miller [D-CA] said.
Congressman Miller is chairman of the House Committee on Education and Labor, and a staunch critic of the 401(k) industry, especially its practice of deducting more than a dozen undisclosed fees from its clients' 401(k) accounts.
"Now you got a bunch of economic wizards jumping in and taking money out of your retirement plan, and they don't wanna tell you how much, you can't decipher it in simple English, and they're not interested in disclosing it, or having any transparency about it," Miller told Kroft.
And the accountability? Would that be the pitchfork part?
"And most of the people that look at their 401(k)s have no idea that these fees are being taken out?" Kroft asked.
"No. Where would you find it? Where would you find these fees in this prospectus? You can look on any page you want, and when you're all done reading it, and you will find some of the fees and the commissions here, but you won't find them all, and I'll bet you won't find half of 'em," Miller said.
There are legal fees, trustee fees, transactional fees, stewardship fees, bookkeeping fees, finder's fees. The list goes on and on.
Miller's committee has heard testimony that [the fees] can eat up half the income in some 401(k) plans over a 30-year span.
That would be the miracle of looted compound interest part?
But he has not been able to stop it.
"We tried to just put in some disclosure and transparency in these fees. And we felt the full fury of that financial lobby," he said.
And now, the lobbyist's view:
David Wray, a lobbyist for the 401(k) industry, says he favors disclosing the fees, but his partners in the financial industry don't.
Asked if he thinks most people know these fees exist, Wray said, "I think they know that there are fees. They don't know exactly how large they are."
"Why do you think the financial services industry is opposed to fee transparency?" Kroft asked.
"I don't know that they're opposed to it. I think the issue is that…," Wray replied.
"You don't think they're opposed to it?" Kroft asked. "You're a lobbyist in Washington, right? You know they're opposed to it. …George Miller hasn't been able to get a bill to the floor."
"I think they want to keep the systems as simple and not make changes. They like the way things are. And whenever you push people out of their comfort zones, you know, it's an issue," Wray replied.
It sure is. Like eating dog food takes me out of my comfort zone. Chacun à son goût!
"I mean, they're comfortable with the situation because they're making a ton of money or they have made a ton of money," Kroft said.
"Well, and their systems are set up in certain ways. You know, this is gonna be a big change."
Well, "change" is what we were promised!
Think the Money Democrat faction running the Party now wants to hear anything about this?
And how about that self-correcting blogosphere? Look! Over there! Sarah Palin!
NOTE Via Yves.
NOTE The analytical concept I think is best for all this is the idea of "rents" (economist's jargon, and not the same as renting a house). These fees are a kind of rent:
[A] rent is an economic advantage in time or space. ... A rent seeking behavior then, is one that uses exclusion of some kind to derive a higher revenue than would be possible. The profits of a monopoly, for example are because the monopolist got there first. ... [A]lmost all rents rely on force, and therefore on some form of government, either de facto or de jure.
Rent, in itself, is not particularly bad, since much of the work people do has deferred payment which comes in the form of rent. Rent represents accumulated information, the background against which we make judgments. That information has value, and it is reasonable to pay for it. Up to a point.
However, as economic thinkers from Plato forward have pointed out, that's not how things go left to their own devices. Instead what happens is that there is "rent seeking" behavior. This is when someone does something not to improve total output, or even shift output from worse uses to better ones, but to reduce competition or give themselves a first move advantage for longer.
For example, extending copyrights, is a rent seeking behavior. Nelson blocking changes to student loans so that private companies in Nebraska can continue to over charge for them is rent seeking. Controlling the flow of oil from OPEC is rent seeking.
Any financial instrument can be rent seeking. In fact, most financial instruments are an attempt to collect a rent.
I call what the banksters did to our 401(k)s "looting" instead of "rent seeking behavior," since right alongside the 401(k) system we have Social Security, that works exactly because it doesn't charge a rent. (And that would be Money Democrats like Bob Rubin want to privatize it, right?)
The best mental model I've been able to construct of what "progressive" means to the administration is "smarter rent-seeking behavior." That's the common factor between propping up the banksters (fees), propping up the insurance companies (fees), never really taking Social Security off the table (fees), maybe even cap and trade (fees) vs. carbon tax. Of course, since these topics (fees) aren't discussed in polite society, it's hard to get the clash that makes for real refinement of models. But we try here, we do try.
If the Money Democrats don't watch out, they're going to make themselves seen as -- and be -- the tools of today's fermiers généraux. From my vantage point under the bus, I'm not entirely sure that's a bad thing.