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Exclusive Interview: Frontline Producer Explains Controversial 401k Documentary – The Ugly

May 02
00:31 2013

(This is the third installment in a series of four articles.)

The PBS Frontline episode “The Retirement Gamble” made the mistake of – unknowingly, Smith implies – featuring two lightning rods that may have caused an unnecessary digression in the case the show was trying to build. First was the The Retirement Gambleprominent role played by John Bogle and his media associates. This, not so surprisingly, led to a recommendation that index funds are the best solution for investors.

“I have no problem with Bogle trumpeting his own products,” said Elliott Orsillo, Co-Founder & Portfolio Manager at Season Investments, LLC in Colorado Springs, Colorado “Index funds are great products for investors to utilize and we rely on them heavily. My issue was in casting all active management fees as bad. There is more at play than simply fees when it comes to making a decision to allocate to a manager or fund. Certain funds or managers produce returns that can’t be replicated with passive index funds and as such, might justify their fees.”

In repeating a meme currently popular with the mass media, Smith spent a lot of air time promoting index funds, even claiming there were no studies to refute his point that index funds provide consistently superior returns. It was only natural, then, when we mentioned such studies (see “Does the ‘Lost Decade’ Signal the End of Passive Investing?, January 5, 2010 and “Does New Study Seal the Deal for Fiduciary Standard – or Just Warn Plan Sponsors?, January 19, 2011) that Smith and his researcher were not familiar with them. Worse, the producers were not aware that their premise for owning index funds – very low expense ratios – was also flawed.

When asked about the cost of the index fund in his current 401k plan, Smith admitted it was 60 basis points. This is certainly on the high end of the spectrum of index fund expense ratios and might in fact be high enough to make actively managed funds a more attractive option (see “A 401k Must Read: Mutual Fund Expense Ratio Myth Busted,”, October 9, 2012). It also indicates the failure of a plan sponsor to do all that is necessary of a fiduciary, like conducting proper due diligence, can often thwart the simple solutions (like “buy index funds” the mass media too often cites). But, to be fair, for small business owners like Smith, it’s often very difficult to devote the time necessary to conduct such proper due diligence. While industry thought leader Roger Wohlner believes “active funds are not all ‘evil,’” he does say, “it takes a good advisor/consultant to sort the good from the bad in terms of active funds.” Judging from Smith’s own 401k plan, it sounds like the same can be applied to index funds.

But there are other problems with relying solely on index funds, and these have to do with the investors themselves. David Rae, Vice-President Client Services at Trilogy Financial Services in Torrance, California, said, “As for index funds being the holy grail of investing retirement, many people have trouble riding the rollercoaster of volatility that tracking the market can bring. They may (emphasis on may) bring lower fees, but do nothing to mitigate the risks or volatility of investing in the stock market. This volatility has led many people to buy high and sell low, over and over again, often reducing their net investment returns substantially more than high fees would do.  DALBAR studies have repeatedly shown investors earning substantially less than the returns of their investments. This may be explained by investing after the fund has gone up dramatically, and bailing out after a market correction. Big example: all the money that went into internet stocks early 2000 right before the crash.”

Things get much more uglier when we look at Bogle’s claim that fees eat up two-thirds of your retirement. “I’d say the remark by Jack Bogle that a 2% fee will reduce your nest egg for retirement by 2/3 or so is really misleading,” said Rae.

In fact, Andrew M. Gracan, Vice-President/Retirement Plan Advisor at First Commonwealth Financial Advisors in Pittsburgh, Pennsylvania provided with a calculation based on the more typical 1% fee. Gracan did this in response to what he felt was an inappropriate “math check” by Smith on Bogle’s 2% claim. Gracan said Smith “used a simple savings calculation and used an assumed interest rate of -2%. Now we know that utilizing a Simple Savings Calculation is not relevant for a 401k plan because 1) Participants are putting money in per paycheck and get the power of dollar cost averaging; and 2) They are actually getting a rate of return on their investment (not the -2% used in the example) regardless of the amount of fees associated with the funds.”  He said, “The impact of 1% of fees in this case would only be 1/8, not 2/3 of the balance that Jack Bogle and Smith are stating.”

Where did Bogle’s mysterious 2% number come from? Was the Frontline producer aware of the 401k Averages Book by Joseph W. Valletta and David W. Huntley? Their book shows 2% is an extreme even for smaller plans (and they even include the mutual fund expense ratio in their number, something some feel should not be done because it’s already included in the fund’s performance number). Did his researchers interview BrightScope? Both of these sources are well regarded in terms of providing average fee data. Both Smith and Knutson were aware of these sources and even spent significant time and effort interviewing BrightScope. Smith said they chose not to air the BrightScope footage because “BrightScope confirmed a lot of what we talked about. It doesn’t reach a majority of 401k plans. It’s like Morningstar.”

BrightScope doesn’t agree. In fact, after watching the broadcast, the company tweeted the following: “For all watching #frontline PBS special on 401k plans, we did a full day of film but our comments were not incendiary enough for inclusion.” When contacted by for comment, Mike Alfred, Co-Founder and CEO of BrightScope, said, “The program was not a balanced look at the US retirement system which is why there was no place for a data-driven firm like BrightScope in the storyline. Our data and ratings show very clearly that while there have been some abuses and inefficiency over the years, American 401k plans on the whole are improving rapidly on nearly every participant outcomes oriented metric we track.”

BrightScope was not the only objective organization to find themselves on the cutting room floor. While “The Retirement Gamble” featured Robert Hiltonsmith, author of the DEMOS report (a report discredited by many, see “Second Look at Headline Grabbing 401k Fee Survey Reveals Major Questions,”, June 5, 2012) and his New School teacher Teresa Ghilarducci, a well-known opponent of 401k plans, it couldn’t find anything in its two hour interview with Dallas Salisbury, CEO of the non-partisan Employee Benefit Research Institute (EBRI) worth airing. Tim Wochok, Retirement Plan Consultant at Loring Ward  in San Jose, California, took issue with DEMOS report author Robert Hiltonsmith. He said, “Robert Hiltonsmith insinuated some standard fees in running a 401k plan as excessive. Due to the structure and ERISA rules that must be followed in operating a 401k plan, they will inherently cost more to run than individual accounts.”

EBRI’s Nevin Adams wrote a scathing blog in response to the show that contains very interesting data that counters much of what Smith chose to highlight in his show. Adams wrote “EBRI provided all of the data referenced here [in his blog] – and much more – to the Frontline producers. In fact, Dallas Salisbury was interviewed on tape for nearly two hours, so we know they had the full picture on tape. That may be what makes the Frontline program the most disappointing, knowing that the program could have presented a balanced picture of ‘The Retirement Gamble’ and the diversity of plans, fees, and outcomes, yet its producers chose not to do so.” When questioned why they didn’t offer this non-partisan group’s response to some of the claims made by Hiltonsmith and Ghilarducci, Smith merely responded by saying the show did indicate that the industry did not agree with the DEMOS report. “I don’t deny that there is controversy with DEMOS,” said Smith. “We were trying to highlight to a general audience that fees have a consequence.” As with much if his response, he readily admitted he was not an expert in the subject area, so perhaps didn’t see the issue as clearly as someone more versed in the 401k world would have.

Smith’s choice to feature highly controversial figures diluted his effort. Most objective observers agree some 401k plans have high fees, but they would be quick to add having a universal fiduciary standard – one that applies to all 401k advisors, would address the issue of high fees. By relying on Bogle and Hiltonsmith, Smith inadvertently moved the debate from the high fee/fiduciary standard core into an unnecessary diversion of the merits of index funds – essentially the moral equivalent of a religious argument – and the DEMOS report – essentially a political argument.

Which leads us to our last installment, and a clue as to why Smith’s last “general reporter” comment might merit greater weight than it’s given – and might just give us a hint as to how those genuinely interested in educated the public on such technical issues like 401k plans should produce their shows in the future as well as why regulators who merely rely on disclosure are doomed to fail.

Previous: The Bad                                                          Next: The Final Take 

Interested in learning more about this and other important topics confronting 401k fiduciaries? Explore Mr. Carosa’s new book 401(k) Fiduciary Solutions and discover how to solve those hidden traps that often pop up in 401k plans.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Joe S
    Joe S May 06, 13:54

    “There is more at play then simply fees” — it should be “play than simply…”

  2. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author May 06, 14:34

    Joe: Thanks for the catch. Correction has been made.

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