An Open Letter to Christine Marcks, President of Prudential Retirement

Happy senior couple budgeting their monthly expenses using calculator at home
Happy senior couple budgeting their monthly expenses using calculator at home

Dear Ms. Marcks,

I thought it was very brave of you to participate in the exceptional Frontline report, "The Retirement Gamble." It has long been my view that investors should limit their investments (in both their personal and retirement accounts) to a globally diversified portfolio of low management fee index funds (including ETFs and passively managed funds) in an asset allocation suitable for them.

In retirement accounts, it's very difficult to implement this sound, responsible, academically based strategy because most plans toss in a few token index funds but populate the balance of the investment choices with expensive actively managed funds (where the fund manager attempts to beat a designated benchmark).

It's not difficult to do the right thing for America's employees. A lot of firms, including those in the BAM ALLIANCE (with whom I am affiliated), offer 401(k) plans that consist solely of portfolios of low-cost, passively managed funds at various risk levels. Participants don't have to put together a risk-adjusted portfolio from many fund options (which few are able to do).

I understand you profess ignorance of the data indicating a majority of low-cost index funds outperform their active counterparts. In a blog post reviewing the Frontline report, Allan Roth reported your response as follows: "Yeah, I haven't seen any research that substantiates that. I mean, it -- I don't know whether it's true or not. I honestly have not seen any research that substantiates that."

I do want to thank you for that observation. I am often criticized for my view that brokers will say anything to capture assets. I was referring to retail brokers who are under pressure to meet their fee goals. I never imagined the president of a major securities firm would be captured for posterity uttering words that are either hopelessly ignorant or appallingly disingenuous. I am going to give you the benefit of the doubt and assume it's the former, but every fiber in my body tells me it's the latter.

I summarize this research in my book, The Smartest 401(k) Book You'll Ever Read. John Bogle does a great job in his book, The Little Book of Common Sense Investing. These are two examples among many. You should also read books by Burton Malkiel, Larry Swedroe, Rick Ferri and William Bernstein.

Really, everything you need to know about this subject you can find in this brief paper by Nobel Laureate William Sharpe called "The Arithmetic of Active Management." Sharpe is not the only Nobel Laureate espousing these views. They are shared by Paul Samuelson, Merton Miller and Daniel Kahneman.

If you want to delve deeper, take a look at this essay by Eugene Fama and Kenneth French called: Why Active Investing is a Negative Sum Game. Are you also ignorant of the research done by Fama and French? Do you read Fortune magazine? It included both of these distinguished professors of finance in its list of the "smartest people alive in finance."

Have you ever heard of Standard & Poor's? It publishes a report twice yearly comparing the performance of active funds to index funds. The most recent report showed that actively managed funds lagged their indexes in 16 out of 17 categories over the past five years.

Now that you can no longer deny knowledge of the credible research, as a responsible corporate citizen, what are you going to do with this data? The choice is clear: You and your colleagues in the securities industry can continue to contribute to the retirement crisis documented in the Frontline report by populating retirement plans with a confusing array of actively managed funds. Or you can act responsibly and join those of us who advocate for the best interest of investors by debunking the myths of picking "hot" performing active fund managers, stock picking and market timing.

Just curious: Have you heard of global warming?

Dan Solin

Dan Solin is the director of investor advocacy for THE BAM ALLIANCE and a wealth adviser with Buckingham Asset Management. He is a New York Times best-selling author of the Smartest series of books.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.