The Retirement Gamble: PBS and Frontline Documentary Review

You Have Two Options: Surrender Control or Take Financial Responsibility

Picture of by Dr David Phelps

by Dr David Phelps

“There has never been a generation yet that has been able to fully retire from a 401(k) or a retirement plan alone.”

In 2013, PBS (through their affiliate Frontline) produced a documentary titled The Retirement Gamble.

It contained some fascinating insights into issues that have largely gone ignored by the financial industry to this day, over a decade later. Here are a few highlights as well as some of my expanded thoughts on the 401(k) retirement model issues. You can watch the documentary here.

The 401(K) is Not The Best Pony to Bet On

Frontline produced this documentary to engage the broader population of the workforce. Employees of large or small companies and corporate America are typically offered retirement plans, known as 401(k) programs.

These retirement plans are marketed as benefits to employees to increase employee retention. They do provide some benefits, but they are not the clear winner Wall Street leads you to believe they are.

The PBS documentary displays many issues with the 401(k), starting with its opaque fee structure.

The Fees That Are Crippling Your 401(k) And Making Wall Street Rich

Mutual funds and broke dealers are heavily involved in managing/investing these 401(k) plans offered through the company, but they are getting kickbacks and commissions.

It’s perfectly legal and disclosed, but most Americans don’t take the time to look at all this or understand what is really happening behind the scenes. Account administrators give a menu of the different funds you can choose from within your 401(k) plan or other retirement plan. Once you select an option, you will get an attached management fee. It’s a small percentage, perhaps 0.2% – 3%. 

The option chosen may also come with a plan administration fee, which is another small percentage. Others will still add individual service fees for every action you take with your money. These small percentages start adding to more than you bargained for, depleting your returns on your nest egg and devaluing your future.

Each of the available funds also has different associated names, invented solely to market it to you. The names can say one thing and do something completely different, misleading you to believe the kind of investments you are actually making.

The Main Issue: Investing is Your Responsibility

I outlined the fees in retirement plan investing to begin breaking down the problems with investing through the 401(k) retirement model. But I can’t go further without acknowledging a truth. We can not put all the blame on those who make money off of these retirement programs. 

The main issue is stated quite well in this documentary. No matter your class, income level, or education, very few people are financially literate. Most do not have the financial acumen or the knowledge of what drives an investment to success and sustainability.

Most are so busy dealing with life, juggling family, business, career, etc., that they don't have time to begin to understand where their money is going. So, most end up abdicating (surrendering) their financial responsibility to their 401(k)s and Wall Street. 

In reality, your finances are your responsibility. It doesn’t mean you can’t have a financial advisor or other types of advisors who can help steward your capital, but ultimately, your capital is best served in your hands.

Now, if you have the opportunity to work for a company that offers a 401(k) and a matching program, I’m not saying that’s the worst thing in the world. What the documentary advises is for employees to take a look at what they're investing in. You can still choose investments through a 401(k), but you must become fully aware of what that entails.

Financially Literacy Combats Wall Street Marketing

Most of you who I'm speaking to are employers. Small business owners, capitalists, and entrepreneurs who are forging their own path through life.

You earned the education, training, licenses, and whatever you needed because that was the direction you wanted to take. You see what you want, and you go for it.

If you are an entrepreneur, you take a lot of risks in life, and most people I know – colleagues, mentees, and mentors – are very diligent and very educated. They are highly skilled, and they operate with high standards.

Neither path is right or wrong. Each of us gets to choose. Good employees are necessary but so are employers. What I’m getting at is, it doesn’t matter whether you are an employee or employer. 

When it comes to money, very few have the first clue as to what they're doing. This can be attributed to Wall Street’s excellent marketing to America on why retirement plans, particularly a 401(k), are the first step to retirement.

Wall Street markets the benefits of tax deferral. And every business owner and entrepreneur wants tax deferrals because they equate it with tax savings.

Again, the benefit is that you can put so much into your retirement account to offset against your active income for that year which grants you a net tax savings.

Combating Your Impulse to Save on Taxes

On certain forums, I discuss the instinctual drive for saving on taxes. Most deal with that impulse by putting their capital in a 401(k), defined contribution plan, or cash balance plan. They all work similarly. They are all tax deferral mechanisms and come with the two following consequences.

Retirement plans lock up your money. Once inserted into a retirement plan, you can't take it out without paying the tax plus an added penalty until you're 59 and a half years of age. You are essentially locking it away for tax deferral. 

Retirement plans can only be invested on Wall Street. Most people don't have the means or the ability to self-direct their retirement plans. Self-directing means you can actively decide what your money is invested in. Many of these retirement plans also can not be self-directed.

So, not only are you locking away your money until you’re 59 and a half, but you’re also locked into Wall Street as the only avenue for investments.

Do You Want to Follow the Crowd?

As entrepreneurs – risk takers, explorers, and those who forge their own careers – you are not the people who typically want to abdicate or surrender control to somebody else.

We’ve been sold and indoctrinated to do what the crowd says to do. The crowd may say, “I saved so much money this year, and my 401(k) is up.” That sounds good on the surface, but remember, bubble cycles occur every six to eight years. The market can go up for a time but it always corrects and comes back down. 

This last market cycle since the Great Financial Crisis of 2008 until now has been an extreme outlier (I explain in more detail as to why that is here in last week’s blog post). This big run-up won't last forever. All of the equities in the financial markets will take a correction, and certain assets will take a much steeper correction.

In the documentary, one particular gentleman (an employee) started investing in his company's 401(k) program and was really trying to understand how it worked. After observing his investments in his 401(k) for 5 years he said, “I thought it would have grown more…It just barely has the contributions I put into it.”

Most people don't realize that it feels good going into an upcycle such as we have experienced recently, until you hit the downcycle and observe all those gains dissipate. You lose potentially 6-10 years of hard work and savings. Who has a decade of time to spare?

The 401(k)’s Impact on Generational Wealth

This documentary is well made, but it left many things out. They didn’t discuss the further legacy impact on entrepreneurs, capitalists, and business owners

How can we pass on our wealth, our knowledge, and our wisdom to keep what we work so hard for in the hands of our beneficiaries, our kids, our grandkids, charities, etc.? And how do we commission the next generation to carry it on in the same way we did?

It's not just about giving or passing on the wealth. It's also teaching them how to utilize the money – how to make and keep money. Keeping money and putting it to work for us is what we’re trying to learn ourselves.

This general wealth transfer issue arises when putting capital into Wall Street. You're not teaching yourself or your kids anything at all except how to give it away to someone else to manage for you. How has that honestly worked out for you? Would you want your kids to do the same?

Speculation vs Investing

Trading stocks is not for the faint of heart and certainly is not something that will build wealth. There are people who are active traders in the market, but I don’t consider that investing. It’s

speculating, which I consider more of a job (trading your time for dollars). Those are two different things. True investing should be done with more consideration for the long term.

You're not looking for outsized returns, certainly, if you get some that’s nice. But the more outsized returns you seek increase your risks for downsides in the long run.

That is not a good way to use your nest egg, what I call your base money. Base money is what you want to have working for you, providing for you in the future when you want to take your foot off the pedal and slow down or retire. This is not money you want to gamble with on Wall Street or by speculating.

Now, I personally never want to “retire” so I use a different phrase. I call it, living life on your own terms. Only when you have your capital base working for you and producing sustainable, predictable cash flow will you have the freedom to evolve to your next position in life whether that is in business, your career, or exiting entirely.

If you want radical change in your career options or business models, you won’t get there by just playing the accumulation game in the 401(k) lock box. 

You can’t just hope that someday when you get to the average age of retirement  (age 70) or you are forced to retire due to physical and emotional burnout, you will have enough to last you the rest of your life. 

That is the accumulation model. You save like crazy, and when it’s time to retire, financial advisors will tout the silly Monte Carlo rule of taking 4% out per year of the principal and any other returns you might be getting. Remember, at this point, they will put you into conservative Wall Street investments like bonds because you can't lose principal anymore.

Bonds now are paying better than they did 2 years ago (4-5% vs less than 1%) because of the rising interest rates. A small positive, but that being said, financial advisors won't let you play the equity game because equity is for gamblers while they make much of their money through the fees of holding on to your capital.

The Birth of 401(k)s

Wall Street also has “hidden” fees that you can’t see in these 401(k) plans. They are technically disclosed but hidden beneath nuance, terminology, and paperwork. You have to know what you're looking for or spend a considerable amount of time to find them; that is exactly what they're saying in this documentary.

The capital in 401(k)s is being eaten up by hidden legal fees. But why is it legal in the first place?

This whole 401(k) construct started back in the late 70s when defined pension plans of corporations provided their workers with annuity retirement income for life.

People retiring from corporate America back then had it made. They didn't have to worry about financial acumen. But as life expectancy climbed (retirees kept living longer) the system became unsustainable. The cost was going up, and profit margins were going down.

Today, there are very few pension plans left. Most companies have gone to the 401(k) model, a defined contribution plan where the employee or the self-employed put money into their own account and then hope, fingers crossed, that Wall Street will somehow do a good job with it.

If you're an entrepreneur, why would you do that? Just because everybody else does it? If you're following the crowd, you will get the average of what everybody else gets. The average today is not a happy ending.

I don't care whether you're an employer or an employee; there has never been a generation yet that has been able to fully retire from a 401(k) or a retirement plan alone. They might aid and abet whatever else you have, but it will not be what gets you to where you want to go.

401(K)s Are Not the Solution, So What is?

Seizing back the reins of your finances, defining what life would look like on your terms, and getting clarity on your freedom number are first and foremost what I recommend.

Once you realize that Wall Street does not provide the average employee or employer with the “retirement” you truly desire, the search for alternatives begins.

I have found in my life, and in the lives of hundreds of business owners and practitioners I mentor, that tangible investments like real estate provide the autonomy and the freedoms I desire.

With the right relationships, the right assets, and the right locations you can create sustainable cash flow without eating into your principal. It will take some education to learn how to do this, and it will require effort on your part.

But once the skillsets and financial acumen are acquired, you can build a network and net worth that can last throughout your life and continue growing into the next generation. 

How do you begin this radical journey? It starts with finding the right people who will show you the way.

To your freedom!

– David


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