(MoneyWatch) Last night, PBS Frontline ran a documentary entitled "the Retirement Gamble." It was well done, interesting, and more than a little critical of my finanical services industry. If you missed it, take a look below.
This must-see piece presents an accurate view of retirement plans in what may be the dirtiest part of my industry. Among the dirty laundry being aired were segments on active funds that come with high fees and indecipherable disclosures, and annuities that were sold to teachers where a great deal of creative license was taken with the guaranteed returns. I can tell you first hand that this documentary does a great job of describing various consumer abuses I see every day.
Personally, my favorite part in this documentary was when Christine Marcks, President of Prudential Retirement, was asked about the overwhelming evidence that exists on indexing beating expensive active investing. Her response, with a straight face, was, "Yeah, I haven't seen any research that substantiates that. I mean, it-- I don't know whether it's true or not. I honestly have not seen any research that substantiates that."
In defense of active management
Marcks looked, at best, ignorant of academic research on investing, or of John C. Bogle's arithmetic on why active investing can't beat low cost indexing. At worst, she might be seen as deliberately disingenuous.It's not surprising, given that Marcks' job at Prudential is to market expensive active funds and annuities so complex that only their actuaries and attorneys are capable of understanding them. Her job security is dependent upon her not understanding arithmetic or reading any study that makes the link between smoking and cancer look weak, by comparison.
I do need to point out, Frontline, that you neglected to include a very critical segment in your documentary -- the vital role that active managers play. Seriously, who do you think keeps markets efficient and allows us indexers to profit? Without the expensive active managers, indexing wouldn't work.
Sure, the 401(k) industry and active investing are pretty ugly, but let's point out some positives. Many 401(k) plans offer low cost index funds. Small companies now have access to low cost plans through companies like Employee Fiduciary or Vanguard direct. Indexing assets have doubled in the past ten years from 14 to 28 percent as investors leave active in droves. At this pace, active investing will be gone in less than 20 years.
Personally, I'd love to see the US Government's Thrift Savings Plan (TSP) open to all consumers due to its simplicity, diversification, and ultra-low costs. But even I'm beginning to get concerned that active can become too small to keep markets efficient. Jason Zweig correctly points out that even active managers use indexing for their own funds, though they're unlikely to admit it without having a couple of beers first.
So Frontline, before you run another documentary exposing the dirty truth about my industry, consider the consequences this presents for us indexers. If active continues to decline, I'm going to ask my Congressman for legislation enacting a holiday called National Active Management Day. April 1st will be the date I propose.