reason is that their 401(k)s look too empty. As people
peer into the contents, they see a retirement disaster
coming. Even after years of working and saving, people
just 10 years away from retirement age have accumulated
of all Americans with incomes up to $91,000 and 401(k)s
have reached age 55 to 64 with $100,000 or less saved
for retirement, according to the Center for Retirement
Research at Boston College.
this fragility has barely gained a peep from politicians
in this presidential election year, think tanks and
college professors have been seeking solutions. Some
have called 401(k)s a failed system. Some long for a
return of old-style pensions even though some companies
and states have made a mess of them.
William Birdthistle, a Chicago-Kent College of Law
professor, has joined the 401(k) critics. In his new
book, "Empire of the Fund: The Way We Save
Now," he describes how mutual funds let people down
and how the government fails to police them. He talks
about what he saw when working as an attorney for mutual
funds before teaching law. The interview has been edited
for length and clarity.
Why do you think the 401(k) system is failing many
Mutual funds are a good tool, but they are like a power
tool or a car. You wouldnít give a person a car and
not give them any driverís education, seat belts or
air bags. Over the last 30 years weíve wanted everyone
to be an investor, to be in charge of their own 401(k).
And we do practically nothing to give them any training.
Itís a fundamentally unfair bargain.
A lot of people who are critical of 401(k)s are
demanding that government bring back guaranteed
I can understand why, but pensions just donít work.
Every time we use them there are problems because of
longevity. People have a way of living a long time. The
people who are supposed to fund the pensions fail to set
aside the money needed to fulfill the obligations, and
they fail to disclose.
And the problem with 401(k)s?
The problem is, we each have our own 401(k) bucket, and
we have to make sure itís as full as possible when we
retire. And a lot of initiatives go into pouring more
water in the bucket, but the leaks are ignored.
A popular solution comes from University of Chicago
professor Richard Thaler, author of "Nudge."
He says: Donít wait for people to take care of
themselves. Instead, employers should pull money
automatically out of each personís paycheck and stick
it into their 401(k) account.
Itís a little cheeky to tell people: "We give you
this new bucket system. You have no training for it, but
the bucket doesnít have much in it, so pour more into
it." Too much of their money leaks out. We have to
stop the leaking.
By leaks, you mean the mutual fund fees that people pay
without knowing it ó the fees that drain their money
away the moment they put anything from their paycheck
into the 401(k) or IRA.
Yes. If you have a house thatís leaking air
conditioning, the solution isnít to turn the air
conditioning up higher without shutting the windows. Itís
just foolish to keep pouring money into a system with a
lot of leaks.
Many people donít realize that they always pay fees
for their funds in 401(k)s, IRAs and 529 plans. But when
I tell them to beware they say consumers pay for
everything: sweaters, phones, computers; so why not pay
for mutual funds?
Of course, you should pay for that service, but studies
have demonstrated that the more you pay a mutual fund in
fees the worse its performance. The more you pay, the
more you are handicapping your funds.
You argue that funds take advantage of individuals
knowing full well that people with 401(k)s are
When you are sold a mutual fund, the fund management
knows exactly how sophisticated you are because you tell
them when you buy for a 401(k). If you buy $100,000, you
are sophisticated and you will get institutional shares,
which will be a better bargain. If you show up with $135
dribbling in from your 401(k), they know you are not
sophisticated. So you have no bargaining clout. Simply
because people operate as individuals they are
You also draw a distinction between a customer buying
products like phones and mutual fund investments.
When you buy a phone, you pay the money and get the
phone. But with funds, itís very different. You give
the fund $10,000, they keep $100, and then you wait to
see if they will make your $9,900 bigger. And some of
your fees go toward advertising so the fund can attract
You emphasize that people must pay attention to fees
because small numbers are deceptive. I find people are
surprised when I say that if they invest $10,000 and pay
half of a percent in fees and earn 10 percent on the
investment they will have about $61,160 after 20 years,
but if they pay 2 percent they will only have about
One solution is for the federal government to open the
Thrift Savings Plan to any American who wants to join.
You could get your investments at a 20th of the price
you would pay for the average equity mutual fund. So the
compounding factor over long-time horizons is just
What do you think of states offering IRA savings plans
at work ó plans like Illinoisí Secure Choice Plan?
It is not a good idea for California, Oregon, Illinois
and many states to each spend money and charge for their
own plans. We already have a really good working model
at the federal level. If we opened up the federal plan
to everyone it would be great for the buyers, but not
the mutual fund industry.
What about the fiduciary standard? Will that help make
sure that people arenít sold expensive mutual funds
when cheaper ones are better?
It wonít solve everything. Instead, I think the
solution is for the SEC to pick the worst mutual funds,
to line up 8,000 and find those with the worst fees, and
sue them. This would be the difference between knowing
thereís a speed limit and knowing thereís a cop out
there to pull you over when charging outrageous fees.
Now we have sheriffs, and they are meek.
The U.S. Department of Labor has blessed target-date
funds as a solution to 401(k) complexity. Are they a
Target date funds have a halo around them because they
were blessed by the government. But you still have to
worry about the fees. On average they charge 0.74
percent, but Vanguard charges only 0.15 percent. What
scares me is people think all they have to do is pick
the target-date fund with the right year in it and they
will be safe. And I say, "no," you must pay
attention to fees or they are going to be ravaging your