Kotlikoff: Advisors Do Retirement Planning All Wrong

Financial advisors don’t have clients’ best interests at heart.

To make this case, Boston University economics professor Laurence Kotlikoff points to their use of “conventional” financial planning rather than “economics-based” planning.

“Advisors are systematically telling clients the wrong thing about retirement planning because they’re trying to maximize their profits,” he argues in an interview with ThinkAdvisor.

Financial advisors guide investors into saving too little, so clients “are left with a 20% chance of being completely destitute apart from getting Social Security,” Kotlikoff asserts.

Kotlikoff, who was on Ronald Reagan’s Council of Economic Advisers, is founder of Economic Security Planning, a firm that produces software for calculating Social Security benefits. His newest book is “Social Security Horror Stories,” co-written with Terry Savage, the journalist and RIA. 

Kotlikoff labels the 401(k) system “an abject failure” and proposes scrapping it along with Social Security for potential beneficiaries. He also favors eliminating other retirement plans that provide tax breaks because, he says, they all encourage spending, not saving.

In the interview, the professor discusses support of a new government-provided retirement plan with compulsory saving contributions.

Here are highlights of our conversation:

THINKADVISOR: In a June “Economics Matters” newsletter, you write that the “Wall Street-managed decades-long 401(k) system is an abject failure. It was enacted by Congress, including members of the House Financial Services Committee. Taking bribes from Wall Street is a time-honored tradition.” Please explain. 

LAURENCE KOTLIKOFF: It’s all of Wall Street, broadly defined — [especially] the mutual fund companies and, to some extent, insurance companies.

Wall Street is the largest contributor to the congressional committees overseeing Wall Street. It’s been one hand washing the other for decades.

Regulators FINRA and the SEC are also in bed with these companies.

Look at the calculators that FINRA has online telling you how much to save for retirement. It’s enough to make any economist throw up.

They’re violating the most basic fiduciary standard in their savings advice right on their homepage.

“The 401(k) system … has enriched Wall Street and provided massive lifetime tax cuts to the rich. [These] … breaks have encouraged spending,” you write. Please elaborate.    

The 401(k) system encourages people to buy mutual funds, thereby benefiting the mutual fund companies. Investors aren’t saving more — they’re putting more money into mutual funds. 

Employers tell employees, “Here’s some free money we’re contributing [to your 401(k)] account], and here are your options.” Some of the funds they have the option to invest in are quite expensive.  

Turning to retirement planning in general, are there any big mistakes that financial advisors are making?

They’re doing everything wrong. Advisors are systematically telling clients the wrong thing about retirement planning because they’re trying to maximize their profits. They’re giving the wrong advice to the American public about what they should do with their savings — how much to save, when to retire, when to take Social Security. 

Everything they’re advising is based on how much money [they’ll make], not on what’s good for the client.

They’re using conventional financial planning, diametrically opposed to what economics-based planning advises. 

If anyone at a top business school taught conventional financial planning, they’d be fired.

We have the technology and methods to tell [workers] exactly the right thing to do, but we have to break through Wall Street to get it to people.

What’s an example of the wrong advice you say advisors are giving?

A CFP will ask, “How much do you want to spend in retirement, and when do you want to retire?” Then they’ll set a target that’s 85% of your pre-retirement income. That’s miles too high. 

Now they’ve baited you into making this your target. But the client isn’t saving a whole lot and doesn’t have a lot of assets.

How can the target be met? 

“Well, let’s try different investments,” the CFP says. “Put your assets with us, and we’re going to charge you a fee.”