October 1, 2018

Saving Retail Retirement Savers: What It Will Take

“…..Canadian politicians seem to be content fiddling with ABM fees while three-quarters of Canada’s private sector workforce lacks adequate workplace pension provision. Maybe we should close the honourable members’ own generous pension plan. That should get their attention.”

The Ambachtsheer Letter, April 2007

 “…..the value-adding investment results of fiduciary principles-driven pension funds contrast sharply with the material value-losing performance of retail mutual funds. As a result, fiduciary principles-driven pension funds will easily generate twice the pension per dollar of retirement savings than a dollar invested in the average mutual fund.”

The Ambachtsheer Letter, May 2016

 “…..it is illegal to favour one group of stakeholders (e.g., service providers) over another group (e.g., retirement savers). Perhaps a class action lawsuit by Australian Retail Super Fund plan members against their ‘trustees’ is needed to make this absolutely clear.”

The Ambachtsheer Letter, June 2018


Will This Time Be Different?

It is usually not good form to quote oneself. This Letter breaks that rule to make a point: leaving workers to sort out the own retirement finances never has been, and never will be a good idea. Previous Letters pointed to three reasons for this: #1. Creating and enforcing one’s own retirement savings discipline is hard, #2. The ‘for profit’ financial services industry has long turned its informational advantage over retail retirement savers into a material source of unearned profitability for itself, and #3. Reasons #1 and #2, combined with changing labour markets, capital markets, and employer attitudes, will likely lead to material financial hardships for many middle- and lower-income workers in countries with inadequate retirement income systems in the decades ahead.

A motivation for this Letter is that two recent events in Australia are finally throwing a bright country-wide spotlight on Reason #2 cited above:

  1. The Productivity Commission Study: in its draft report, this independent research and advisory body of the Australian Government identified a number of flaws in parts of Australia’s $2 trillion workplace pension system including design inefficiencies, ineffective regulation, high fees, weak governance, as well as entrenched underperformance in certain segments of the system.
  2. The Hayne Royal Commission Hearings: these live televised hearings are causing a sensation in Australia as senior executives from the ‘for profit’ retail super sector are being forced to publicly admit that they have been using a ‘fees for no service’ business model for decades. This has resulted in materially inferior financial outcomes for retail fund members compared to those in the ‘profit for members’ super sector. At the same time, financial services regulators have been turning a blind eye to this wealth-extraction reality for decades. Amid clamours for fines and even jail terms, a class action ‘Get Your Super Money Back’ law suit has been launched on behalf of the estimated 1/3rd of all adult Australians who participate in retail super funds. Calculations show that the ‘get your money back’ amount could add up to $120 billion, 20% of the capital of the Australian banking system.i

Meanwhile, dissatisfaction with Chile’s 35yr-old retirement income system has led to country-wide demonstrations there. Studies suggest its causes are poor design, insensitivity to changing circumstances, and a wide perception that the system is being run for the benefit of the service providers rather than for members.ii

If these Australian and Chilean events lead to further studies or hearings in other countries that reach similar conclusions, might this finally trigger the much-needed reforms of workplace retirement income systems around the world? Hopefully ‘yes’! The remainder of this Letter anticipates what those reforms should and could look like and accomplish.

What Do Employers and Employees Want?

Recent U.S., Canadian, and Dutch survey-based studies tell an interesting tale about employers and employees attitudes on personal finance, retirement savings plans, and what they want from themiii:

  • ‘Financial challenges’ were the #1 stressor for 40% of employees in a recent survey. The other two important stressors were ‘my job’ (21%), and ‘my health’ (15%).
  • Asked how worried they were about their retirement financial security, 38% of employees were worried, 37% were not, and 25% had not given it much thought. The self-employed, the divorced, and house renters were especially worried.
  • Asked ‘what would help most to achieve your financial goals’, one of two popular responses common to Millennials, GenXers, and Boomers alike was ‘a rising stock market’. The other popular helper was ‘better job security’.
  • Asked who they trusted to provide financial advice, 80% of employees mentioned financial advisors, 50% themselves, and 25% the media.
  • Most employers want to help their employees achieve financial security, but many worry about the expenses and risks involved, and also about their lack of know-how about which external service providers to trust and partner with.
  • Valued retirement savings plan features employers and employees agreed on were: broad accessibility (e.g., including part-timers and contract workers), flexible contribution rates, portability from employer to employer, through-retirement coverage, and strong fiduciary oversight.

These responses seem logical with one exception: the continued belief by many employees that financial advisors are a trusted source of financial advice. I wonder if that would continue to be the case if they knew the results of the study by Profs. Linnainmaa, Melzer, and Previtera cited in our May 2016 Letter. The authors (two American, one Canadian) studied the investment portfolios of over 5,000 Canadian financial advisors and of over 500,000 of their clients over the 1999-2013 investment period. The data was provided by three Canadian mutual fund dealers.

About the study, we wrote at the time: Their study compared the investment behavior and results of a large sample of mutual fund investors and those of the financial advisors who advise them. While conflicts of interest do appear to impact the behavior of some advisors, there is a bigger problem. There was a strong correlation between how advisors advised their clients to invest, and how they invested themselves. However, their own investment results were, on average, worse than their clients’. While their clients underperformed their passive benchmarks by an average 3%/yr., the advisors’ own portfolios underperformed by an average 4%/yr. The researchers conclude that in too many cases, advisors are drawn into the industry with the misguided belief that the combination of high-fee funds and high turnover will improve            investment performance.iv    

The Simple Economics of Retirement Finance and its Consequences   

So how much does a 3%/yr. return ‘haircut’ over a 40-year retirement savings accumulation period cost in terms of a lower pension payout in the subsequent decumulation period? The answer is not difficult to calculate. Assume a Jill or a Joe who earns $60K/yr. for 40 years and contributes $5K into a retirement savings plan each year (i.e., about 8% of pay). At a net 3%/yr. return, the contributions accumulate to a retirement savings pot of about $400K in 40 years. Under reasonable assumptions, such a pool is        convertible into an annuity that will replace about 35% of working income in retirement. Thus together with a good government-sponsored Pillar 1 universal pension, Jill or Joe should be comfortable in their retirement years contributing 8% of pay into a workplace pension plan during their working lives.v

However, with a 3%/yr. return ‘haircut’ (hence at a net return of 0%/yr.) the $5K/yr. accumulates to only $200K rather than $400K. Ergo, Jill or Joe’s 3% net return ‘haircut’ in their accumulating workplace retirement savings translates into a 50% pension reduction at the end of the accumulation phase. The pension ‘haircut’ will likely even be greater, depending on how they convert their retirement savings pool into a retirement income stream.vi

Now translate these ‘micro’ calculations into ‘macro’ country-wide and multi-country contexts. At $1 trillion of retirement savings, an annual 3% ‘haircut’ adds up to a highly material $30 billion/yr. wealth transfer from retirement savers to ‘for profit’ service providers. At $10 trillion the annual transfer becomes a mind-boggling $300 billion. Clearly, we should not permit wealth extraction at these levels to continue if we want the Jills and Joes of this world to be able to finance their target retirements at affordable contribution rates.   

So What Should Be Done?

Each country has to figure out the specifics of the ‘what should be done?’ question in its own national context.vii However, the summarized American, Australian, Canadian, Chilean, and Dutch research and survey findings point to the direction effective retirement finance reform lies in any country. Here are six concrete steps:   

  • Ensure the country’s universal Pillar 1 pension arrangements are sustainable and well-understood. Rather than focusing on a specific retirement date, offer a series of optional retirement start dates with pension amounts calculated on an actuarially-fair basis.
  • All workers should have access to a well-designed, cost-effective, ‘through retirement’ workplace pension plan explicitly managed in members’ best interests.
  • Employers should be required to make such a plan available to all workers, including part-time and contract workers.
  • Such plans should be broadly accessible, have flexible contribution rates, be portable from employer to employer, offer through-retirement coverage including longevity risk-pooling, practice fiduciary-driven governance through qualified oversight boards, have scale, and offer full stewardship ‘value for money’ disclosure.viii
  • Ensure the plan has well-thought out decision-defaults for those who can’t or won’t make their own choice decisions, and that financial advice to individuals is only offered through objective AI protocols and by well-qualified people in non-conflicted positions.
  • Ensure that the country’s legislative and regulatory branches proactively guide the country’s retirement income system towards serving the best financial interest of its citizens.

Taking these six steps would indeed save retail retirement savers around the world. Some countries have already started.ix Let’s build on these beginnings and get on with it!

Keith Ambachtsheer



  1. The June 2018 Letter actually suggested the affected Australian retirement savers launch cost-recovery class action law suits.
  2. See for example, “Outsiders’ View of the Chilean Pension System” by a Working Group of the International Centre for Pension Management (ICPM).
  3. See the recent P&I booklet “Financial Wellness under Construction” for the U.S. data, the recent Commonwealth publication reporting Canadian data gathered by Pollara Strategic Insights, and IPE’s report on Dutch consumer preferences expressed by the financial education organization Nibud.
  4. See “Costly Financial Advice: Conflicts of Interest or Misguided Investment Beliefs?” The client investment performance results reported in this study are consistent with those of prior studies of mutual fund performance   performed over the course of the last 20 years. However, as far as I know, this is the first study to document that the average investment performance of the advisors’ own portfolios were even worse than those of their clients’. The study’s general findings are also consistent with a personal experience from some time ago. A  just-retired Canadian friend had a $300K retirement savings portfolio. It was made up of five high-fee equity mutual funds with no obvious connection to her age, risk tolerance, or her approaching need for supplemental retirement income. Her ‘advisor’ was shocked when she informed him that she was closing the account, paying the indefensible 6% redemption fee, and moving to a lower-cost solution more suitable to her circumstances. Today, 4 years later, her now-$360K high-quality/high yield/low fee retirement portfolio is generating a net $15K/yr. cash investment income. Together with her Old Age and CPP pensions, home ownership, and some other retirement benefits, she can now maintain her standard of living indefinitely. She is very happy.
  5. Implicit in these calculations is the assumption that a well-managed pension fund can earn a net 3% real rate of return. Research confirms this indeed a reasonable assumption. See, for example, the September 2018 Letter on long-term investment return prospects and the August 2017 Letter on the Canada Model. The other implicit assumption is that other sources of retirement income (e.g., the Pillar 1 universal pension, home ownership) will roughly double the 35% income replacement rate from the workplace pension.
  6. Not only is the return differential likely to continue in the decumulation phase, without longevity insurance a worker has to also self-insure against living longer than expected by accumulating additional retirement savings.
  7. Such national initiatives should be evidence-based and actively engage its target audience: private sector workers without workplace pension plans.
  8. This Letter consciously avoided the outdated ‘DB’ and ‘DC’ descriptors. Twenty-first Century workplace pension plans embody the best of both.
  9. For example, the NEST retirement savings initiative in the UK is achieving its intended purpose. A number of state-led ones in the USA are off to promising starts, as is The Common Good Plan launched this year in Canada. The combined impacts of the Productivity Commission report and the Hayne Royal Commission hearings should lead to strong measures to steer Australia’s $2 trillion super system in the right direction. The recent reform studies on the Chilean system will hopefully achieve the same end. 

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The information herein has been obtained from sources which we believe to be reliable, but do not guarantee its accuracy or completeness. 



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