Comedian John Oliver really has a knack for delivering biting social commentary with the right proportions of wit, sarcasm, and incredulity. He’s taken on topics ranging from the presidential primaries to Brexit to the Miss America Pageant.
So imagine my delight when Oliver took it upon himself to rip apart the very world I navigate daily: the retirement industry. Despite an estimated 53 million Americans who have actively participated in a 401(k) plan,1 most probably don’t find the topic to be particularly sexy, compelling, or engaging. And I understand why—retirement plans are something we typically don’t want to think about until it’s too late, plus they’re often unnecessarily complicated.
That’s why this video above (Warning: This video contains strong and potentially offensive adult language) is so important—it’s nearly 22 minutes of hilarious, intelligent, thoughtful, commentary on a topic most people couldn’t care less about—but should. With nearly 3.8 million views and almost 3,900 comments (and counting), the clip has been seen and shared by more current and future retirees than I could ever hope to reach with my own (admittedly less humorous) guidance. If you haven’t watched it or shared with someone you care about, you should. While I don’t completely agree with everything Oliver says, I think he’s mostly right on most of his points.
In the interest of making his video fun and interesting, Oliver may or may not have gotten all the facts straight. If you take the time to watch Oliver’s video, you might also read the John Hancock response, which can be found on several retirement industry websites, including www.asppa.org. Here are the top five things Oliver has mostly right about the retirement industry with some of my own insights and experiences added:
1) You probably don’t know what a financial adviser really is.
And it’s definitely not your fault—there’s a lot of deception and false advertising in this field, and Oliver makes that clear. The problem is that unlike other professions, there is no consistently enforced definition of the term “financial adviser.” That in itself leaves a lot open to interpretation, and adding to the ambiguity is the fact that the term “financial adviser” is often just code for “financial product salesperson.” Many people don’t know this, and tend to lump financial advisers in the same category as doctors or lawyers–licensed professionals compensated for their specialized skills. While this could be the case, it often isn’t—usually, financial advisers are just salespeople working on commission.
According to Curelli Associates, there were 285,000 financial advisers in the U.S. in 2014. And I estimate a little over 2 percent of “financial advisers” in the U.S. focus primarily on 401(k) plans.2 In my experience, the elite financial advisers often work with larger plans as opposed to the new (and therefore small) plan Oliver refers to. At a recent industry conference, I was in a room with 30 or so representatives and most had a handful of plans, and only a few had more than 10. It’s hard to become proficient at something as complicated and confusing as advising the management of a 401(k) plan without specializing in it.
2) Conflicts of interest are too common.
Oliver calls out one of the biggest issues with most small or newer 401(k) plans that very few small business owners or employees understand: conflicts of interest are rampant, especially in smaller plans. The financial adviser is getting paid to recommend expensive funds, regardless of whether they’re good for the client or their employees. The financial adviser is doing too little to help the employees towards a dignified retirement. I regularly talk to employers who have these conflicts in their plans, and it’s unfortunate. Oliver touches on some good examples, but he’s not even highlighting some of the more pernicious ones. For example, some financial advisers sell 401(k) plans as a “loss leader” so they can eventually sell expensive insurance products to employees. They view the 401(k) plan as a rich lead generation source. That must stop.
What you actually need is a fiduciary. Here’s what the term means: A fiduciary is an individual who takes responsibility for making certain decisions, with a legal and ethical responsibility to act in the clients’ best interests. That means this person is obligated to put the client’s well-being ahead of their own monetary gain; a concept that’s totally inconsistent with the conflicts of interest mentioned above. This term is crucial to the core of retirement plans, but it’s something many people don’t seem to understand—I’ve even seen financial journals and publications mess this one up. Oliver is making a major statement here that I wish I could communicate: Ask your financial service provider if they’re a fiduciary. If they say no, run. I would, however, advise taking this a step further—don’t just ask, get it in writing. It may sound extreme, but this is the only guarantee you have that the investment decisions your financial adviser makes are for your benefit, not theirs.
3) 401(k)s are way too confusing. Teacup piglets are much more interesting.
Here’s where the teacup pigs come in. Oliver is making an incredibly insightful observation here: most people would rather think about, well, anything other than retirement plans. I can’t think of a more genius way to illustrate this point. They’re boring, they’re confusing, and they lack all the charm of a cute miniature pig. And this demonstrates why it’s so important to seek out financial advisers who act in your best interests and can guide you through all the chaos and confusion—especially if you’re heading up a small company of 10, 50, or 100 employees. You have plenty of other fires to put out—decoding retirement plans doesn’t exactly rank high on the priority list, and the details are just too far outside the realm of what most non-financial people are dealing with on a regular basis. This makes the value of a financial adviser who is a fiduciary even more important for smaller 401(k) plans.
4) Invest in index funds (but watch out for this).
Oliver is on the right track when he suggests most people would theoretically be better off in index funds. However, in my experience, most 401(k) participants don’t know which index funds to select and often struggle with major cognitive biases:
1. There are way too many options—people get overwhelmed and are unable to make a decision.
2. Because there are so many options, people don’t know how to choose, so they end up picking funds randomly; depending on which they pick, they can get different results.
3. People tend to react to recent market volatility, instead of focusing on a consistent savings and investment plan. It’s been well-documented that when the market is up, investors tend to focus more on “aggressive” or “riskier” investments, and when the market is down, they focus more on less risky or “conservative” investments. They’re essentially buying high and selling low. That is counter to what I think investors should do: They should keep saving money and keep their investment plan consistent, even through choppy markets. Investors want to maximize their returns, so many think it’s logical to choose funds that have recently performed well. But short-term performance shouldn’t be the main reason for selecting funds, and in fact, a “buy-and-hold” approach is the better option.
5) The DOL rule is a great thing (but could be even better).
(The DOL's Fiduciary Rule was vacated in May 2017)
In April, the Department of Labor (DOL) came up with an amendment to its fiduciary rule which is arguably the most impactful and meaningful regulatory change since 1974’s ERISA (the Employee Retirement Income Security Act). And yet, hardly anyone outside the investment world understands the magnitude of this. Under the Obama administration, the DOL has pushed for many years to make financial advisers and financial firms act as fiduciaries, and I think that’s a really good thing. But as Oliver points out, there’s been a huge backlash from the industry, and firms who sell high-fee investment products have fought (and are still fighting) tooth and nail because this rule impacts their profit margins.
My opinion is that this will be a good long-term move for the industry, but it’s an imperfect rule with room for improvement. There could have been a clearer, harder line on the definition of “fiduciary.” As it stands, the rule is a document with hundreds of pages that contains exceptions, loopholes, and contradictions. Those who opposed the rule the most had a much more negative view towards the proposed rule than they did towards the final rule.3 Why? The proposed rule took a much harder line on the kinds of abuses Oliver objects to. The final rule provides more exceptions to avoid having to act as a fiduciary should. My other criticism is that there’s no real accountability here. If you’re a financial adviser and not a fiduciary, what is anyone going to do about it? While it’s true that there’s some enforcement, it’s weak.
some good, simple advice.
In the end, Oliver’s video offers some solid advice based on a few key points:
First, stop investing in Elf school (or whatever else you’re sinking your funds into). Save and budget your money so you can keep putting that money in your retirement fund. Make some sacrifices and stop spending on useless things; easier said than done, but it’s good advice.
Since most investors cannot beat the market, index funds are often good investments for the average person investing in their 401(k). However, make sure you are actually getting index-like returns, and not letting cognitive biases trip you up. More sophisticated investors may utilize other types of funds and investment vehicles. Need help? Use a fiduciary financial adviser—and, as I mentioned, don’t just ask, but actually get it in writing. If they’re not a fiduciary, run.
Finally, strive to keep your fees low. Paying more than one percent can be well worth it if you’re receiving meaningful services and individualized attention, but many plans are barebones and leave you largely on your own. In these cases, you should look for much lower overall fees.
While I have my small gripes, overall, I love this video and I’ve been recommending it far and wide. Not only is it unbelievably funny, but it shines a spotlight on an issue yet to break through in the mainstream. I can’t overstate how huge that is for the retirement industry, and how exciting it is to see people taking an active role in understanding their future. Way to go, John Oliver.
And yes, now you’re free to go back to image searching teacup pigs.
1VanDerhei, Jack, Sarah Holden, Luis Alonso, Steven Bass, and AnnMarie Pino. "401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2013." Employee Benefit Research Institute No. 408 (2014): n. pag. Web.
2Per Discover Data, there are approximately 61,000 financial firm representatives, of any kind, who offer retirement plans such as a 401(k) plan. Approximately 6,000 financial advisers currently have 401(k) plans their primary focus. "Following Up." Message to Nathan Fisher. 5 Feb. 2016. E-mail.
3The Economics of Change: How the DOL Fiduciary Rule Will Set Money in Motion and Alter Business Models Across the Advice Industry. Investment News Research, 2016.