The 12-Step Recovery Program for Retirement Gamblers


Watch The Retirement Gamble on PBS. See more from FRONTLINE

For the last fourteen years, IFA has been educating investors on the sensible way to invest through its 12-Step Recovery Program for Active Investors, based on decades of academic research. Amid all the clamor and din of Wall Street advertising and the talking heads of the financial media, we sometimes feel like the proverbial lone voice in the wilderness. That is why it was so refreshing to turn on the TV and watch the PBS Frontline documentary The Retirement Gamble (the video above). If you have not seen it, please watch it at your earliest convenience. This incredibly informative piece narrated by Martin Smith reveals the truly horrible mess that is now the state of retirement security in the U.S. The primary cause of this mess is the steady decline of defined benefit pension plans and the ascendancy of 401(k) plans, which has essentially transferred investment risk from employers to employees who are ill-suited to the task. For most plan participants, the 401(k) is a complex mystery. As Professor Teresa Ghilarducci put it,

“The 401(k) is one of the only products that Americans buy that they don’t know the price of it, they don’t know the quality of it, and they don’t know its dangers.”

Originally, in the mid 1980’s, the 401(k) seemed like a great idea because the bull market delivered fantastic returns that caused people to think that saving enough for their retirement would be a slam-dunk.  We had pundits telling us to get invested in the stock market like Peter Lynch of the Fidelity Magellan Fund:

“You shouldn’t be intimidated. Everyone can do well in the stock market. You have the skills. You have the intelligence. It doesn’t require any education. All you have to have is patience – do a little research – you got it!”

The dismal record of professional stock pickers (never-mind amateur stock pickers) is documented in Mark Hebner's Index Funds: The 12-Step Recovery Program for Active Investors and in particular Step 3: Stock Pickers.  Despite a few hiccups such as Black Monday of 1987 when the stock market lost 23% in a single day, the optimism of the 1980’s continued into the 1990’s, which culminated in the dot-com bubble. Plan participants who put a large portion of their savings into growth or technology funds got slaughtered. Also, many plan participants made the mistake of investing their retirement savings in their company’s stock. When the recession hit in 2000, they faced a double whammy of unemployment and decimated savings. The coup de grace was the financial crisis of 2008 when the market dropped by over 50%. Unfortunately, many 401(k) participants gave up and moved into bonds and cash, thus missing the rebound that began in March of 2009. The poor behavior of unguided 401(k) participants becomes clear when viewed through the lens of behavioral finance. As Warren Buffett’s mentor, Benjamin Graham so eloquently put it, “The investor’s chief problem – and even his worst enemy – is likely to be himself.”

Regarding the topic of the plight of 401(k) participants, one of the more interesting interviewees was Robert Hiltonsmith, an economist with the Demos think tank, who authored The Retirement Savings Drain: Hidden & Excessive Costs of 401(k)s. Hiltonsmith found that a two-earner household, where each partner earns the median income for their gender each year over their working lifetime, will pay an average of $154,794 in 401(k) fees and lost returns. For higher-income households where each partner earns a 75th percentile income, the cost is $277,969. Where does it all go? Hiltonsmith identified over a dozen different types of fees charged to 401k participants, including mutual fund fees, trading fees, marketing fees, administrative fees, and recordkeeping fees. Step 7 Silent Partners of the 12-Steps takes an extensive look at the sources of fees and expenses that eat away at the returns of all investors.

To reinforce the point of just how erosive these fees are, the legendary John Bogle produced a calculation showing that over a working lifetime of 50 years, a 2% fee levied on a 7% return results in a 61% cut to the final ending value, as seen in the chart below.

As Bogle so eloquently put it,

“What happens in the fund business is that the magic of compound returns is overwhelmed by the tyranny of compounding costs. Do you really want to invest in a system where you put up 100% of the capital, you take 100% of the risk, and you get 30% of the return?”

When confronted with Bogle’s numbers, the director of retirement plan services at JP Morgan, Michael Falcon, appeared distinctly uncomfortable when he admitted to not knowing the math behind it but still dismissed it as sounding too high. Falcon’s cluelessness was only matched by his counterpart at Prudential, Christine Marcks, who claimed not to have seen any research that supports the use of index funds over actively managed funds by 401(k) plan participants. Memo to Christine: Please read False Discoveries in Mutual Fund Performance and Luck versus Skill in the Cross-Section of Mutual Fund Returns. The pie chart below summarizes the finding of the first paper.

Regarding the state of denial that pervades the big Wall Street banks, financial journalist Jason Zweig had this to say about it:

“One of the ultimate dirty secrets of the mutual fund industry is that a lot of the people who run other fund companies own index funds in their own accounts and don’t talk about it unless you put a couple of beers in them.”

One of the underlying problems with 401(k) plans is that they are often established and serviced by financial professionals who are not considered fiduciaries to the plan participants. A fiduciary is required to act only in the best interests of his or her client. The concept of being a fiduciary is so central to IFA that our tagline is “fiduciaries for wealth." A more detailed explanation of exactly what that means can be found in this article. Only 15% of all the financial advisors in the United States are held to a fiduciary standard of care. The remaining 85% only have to meet a “suitability” requirement, which allows for high expense actively managed mutual funds. As Ron Lieber of the New York Times put it,

“This doesn’t have to be the best [investment] that you can pick for them. It just has to be OK. I can’t believe somebody would want to get in the business and stay in the business of merely being suitable.”

Since the majority of 401(k) plan participants end up choosing their investments without the benefit of guidance from a fiduciary, they often end up with asset allocations that are completely inappropriate for their situation.  The long-term damage that can result from an improper asset allocation is on par with the damage that is inflicted by high expenses discussed below. Based on the historical returns of the IFA Index Portfolios, we find that somebody who should have been in an 80% equity/20% fixed income portfolio would have received a 2.1% lower return and a 62% haircut in the final value over his working lifetime if he had chosen a naïve 50-50 allocation. The chart below shows the stark difference in the growth of $1,000 between the 80/20 portfolio (represented by IFA Index Portfolio 70) and the 50/50 portfolio (represented by IFA Index Portfolio 40). Both portfolios are assumed to be on a glide path, meaning that the percentage allocation to equities decreases by one percentage point each year.

Index Funds Advisors strongly supports the proposed rule to allow only fiduciaries (i.e., registered investment advisors) to give advice on retirement accounts. While much more work needs to be done to clean up the retirement mess, this would be an excellent first step. Retirement (and all other types of investing) should not be a “gamble." Mark Hebner's book speaks directly to this point by outlining a 12-step program for people who are addicted to gambling (speculating/actively trading) in the financial markets. If you would like to learn more about the type of 401(k) plan that is recommended in this documentary, please visit, and if you would like to have your existing plan evaluated by a genuine investment fiduciary, check out IFA’s retirement plan scorecard. If you have any questions about 401(k) plans or other investment topics, please feel free to call us at 1-888-643-3133.