The Rising Tide of Insecurity: Wall Street’s Exuberant Embrace of Individual Investors
--- In 2008, mortgage-backed derivatives crumbled the housing market like it was a deck of cards and launched one of the steepest stock slides in American history. It also was the year Wall Street doled out $18 billion in bonuses to banking executives, fund managers and brokers, much of it from the profits made by selling new financial products to individual investors.
In a recent Frontline report, correspondent Martin Smith investigated the costs of managing an individual retirement account, or 401(k). He found a proliferation of financial products flooded the market as individuals scrambled to replace vanishing pension plans; but those products are often poorly constructed, poorly understood by consumers, and do little to produce financial security.
Smith reported Americans have $10 trillion invested with financial services providers, yet they are not making the money they will need for a secure retirement.
“The 401(k) is the only product Americans buy that they don’t know the price of it,” Teresa Ghilarducci, Professor of Economics at The New School told Smith. “It’s also one of the products Americans buy that they don’t even know its quality. It’s one of the products Americans buy that they don’t know it’s a danger. And it’s because the industry – the mutual fund industry – have been able to protect themselves against regulations that would expose the danger and price of their products.”
Pressed by economic globalization, shifting job markets, a more volatile stock market and longer life spans, employers began looking for a way out of the retirement business that had become more expensive to properly manage than in the past. Wall Street was waiting. Big brokerage houses and banks saw the opportunity for new business and helped employers set up and run 401(k) plans.
But too many people know too little about investment strategies to invest wisely, and too often they dip into their 401(k) accounts to meet current expenses. Steep compounding fees for marketing, trading, and administering the funds can sap earnings by as much as two-thirds over the life of the investment, and there is no protection against sudden market drops. The results have been dramatic and depressing.
Senator Tom Harkin (D-Iowa), chairman of the Health, Education, Labor and Pensions Committee has conducted research that shows nearly 6 million Americans over 65 were living in poverty in 2010. The Center for Retirement Research at Boston College reported to the Wall Street Journal just 8% of households approaching retirement have the necessary funds in their 401(k) to achieve 85% of their current annual income.
Corporate America has been shedding traditional pensions since the 1970s when, according to the Frontline report, 42% of [private sector] Americans had a pension. The National Institute on Retirement Security calculated as recently as 1998, 52% of Americans over 60-years old still had a pension; but by 2010 just 43% of those over 60 had a pension, and when public workers are backed out, just 15 percent of private sector workers had a guaranteed pension in 2010.
Unlike stock market accounts that rise and fall daily, institutional pension funds pool resources and share risk over time, they are professionally managed and yield more consistent returns. The Frontline report makes clear that American workers are only just beginning to appreciate the pending retirement crisis facing them, but American taxpayers will be forced to reckon with it soon enough.
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Raymond Edmondson, Jr. is CEO of the Florida Public Pension Trustees Association, a nonprofit educational organization offering a nationally recognized certification program for public pension trustees. More than 250 of the state’s 490 municipal pension plans are FPPTA members. Contact him at firstname.lastname@example.org.