Charles Schwab CEO calls for retirement plan reforms
November 13, 2013 | By Monica Coleman | firstname.lastname@example.org
Walter W. Bettinger, CEO of Charles Schwab Corporation in its 40th year, called for fundamental reforms in the 401(k) industry at a Nov. 11 National Press Club Luncheon.
"Today, there are over 50 million Americans in retirement plans,” he said. “The 401(k) plan is the primary or exclusive savings plan for over half of Americans today” said the 30-year veteran pension and retirement plan expert. He noted that the median 401(k) plan today is only a little over $40,000.
Risks to hardworking Americans have increased since industry standard, employer-based pensions were displaced with individual 401(k) plans, he said.
Bettinger pointed out that prior to the 401(k), employer-based pensions were responsible for assuring employees received a fixed monthly income upon retirement.
He noted that employers were armed with “legions” of experts to ensure success, such as actuaries, advisors, accountants and consultants – expertise not available to individual 401(k) plans.
The CEO said most employees choose their retirement planning options through one hour education meetings, plan brochures, a list of mutual fund choices and “slider” calculation rulers.
He believes the answer to the dilemma is to automatically enroll every participant in a customized program through an independent source with fiduciary responsibilities – service providers, those selling investment products, must be excluded.
He emphasized that multiple criteria must be used to determine how much and where investments should be made. As opposed to the singular age criteria now applied, Bettinger said advisors should also include risk tolerance, existing assets, marital status, children, etc. He said that a typical 45-year-old getting independent counseling would have 70 percent more money in their account by retirement.
Bettinger points out that there are costs associated with such advice, but indicated that the answer is to reduce transactional costs by placing most retirement accounts into funds indexed to the market instead of actively managed funds that attempt to outpace the market.
As he points out, few managers can outpace the market and even fewer do so consistently. “I’m not a critic of active managers,” Bettinger explained, “but it does not need to be part of a 401(k) plan. The goal is not to beat the market, but to procure a secured retirement through consistent performance.”
Bettinger said that using index funds would significantly lower fees, possibly to half a percent. “If all we did was lower fees to half a percent, the average American would have approximately $100,000 more in their account at retirement,” he concluded. If this were applied to the 51 million Americans across the board today, by 2050 it would be almost $10 trillion (though he admitted it would have little effect for those soon retiring).
There will be resistance from the tens of thousands of industry professionals who make billions of dollars through the fees he is asking to cut, but concluded that it must be done. “There are 50 million Americans counting on us to make the change,” he said.