LIKE MOST PEOPLE whose quality of life depends upon the fluctuations of an IRA, 401(k), 403(b), or other acronym-soup retirement account, I was born long before such things existed. It's easy to forget, now that more than half of us have been made shareholders, that until well past the middle of the 20th century, most people had nothing to do with the stock market: Wall Street was for the wealthy and the reckless. It was a world most Americans didn't understand and, after 1929, didn't trust. Some lucky people had pensions, but few had the privilege of even thinking about retirement. They were too busy trying to survive the present—which in my childhood meant the Great Depression and then World War II.
I spent the war years in Washington, DC, where my father had a minor position in the Roosevelt administration. After school, my brother and I spent most of our time running around the streets, trying to get the air-raid wardens to give us a scrap of nylon parachute, or maybe even one of their cast-off World War I helmets, before the blackout drill began. One evening, my mother called us into the dining room and solemnly presented each of us with a $25 war bond. That was my first contact with the world of investment. Compared to a piece of parachute, it was a real downer.
Sixty-five years later it's a downer still, as I contemplate my future at a time of deep recession with no pension and a depleted 401(k). And it occurs to me that the very notion of a comfortable, paid retirement may turn out to have been a temporary phenomenon, with a life span almost precisely the same as my own.
The United States instituted military pensions after the Civil War, but German chancellor Otto von Bismarck is generally credited with creating the first national pension system, in the late 1880s, partly to combat the growing appeal of Marxism. Since Bismarck's pensions kicked in at 70, and the average life expectancy in Germany at the time was under 45, it wasn't much of an investment on the part of the state. In fact, until about World War II, a majority of people died before they reached what we now think of as retirement age; those who made it to 65 depended on savings or relatives, or went to the poorhouse.
The truly pivotal moment in the history of paid retirement came in the year before my birth, 1935, which saw the passage of the Social Security Act (again, in part to ward off more radical proposals). This system lifted millions of the elderly out of poverty, though it would never, by itself, provide a comfortable living. That came with the rise of employer-funded pensions, which were fought for by unions in the early part of the century and expanded during World War II, when they became a way to reward workers during government-mandated wage freezes. Suddenly, retirement became a possibility for millions of American workers.
These workers had "defined benefit" plans, which promised a steady monthly payment at retirement. Although a portion of the pension funds might be invested in the stock market, the payout to workers didn't depend on the market's fluctuations.
After the war, my father joined IBM and remained there for about 15 years. I remember that he was constantly in debt from paying our college tuitions and medical bills for his ailing parents. He never talked about it, but every so often, I would see a line of bills from credit companies spread out on the bed. He had a fierce dislike of Wall Street and the banking industry, formed during the Depression and abetted now by his high-interest debts. Although he had a three-hour round-trip commute on the New York Central Railroad every day from our home in a then-unfashionable part of the Hudson Valley, he often remarked how grateful he was that he didn't have to ride the New Haven trains with all the cocktail-wielding brokers. Even if he'd had any money to spare, he wouldn't have invested it on Wall Street. But when he retired, he got his pension, which my mother continued to collect after he died—not much, but enough to live on in a frugal way.
I WAS PLUNGED into the world of finance when I got my first job, at the Wall Street Journal, at the beginning of the 1960s. They put me to work writing up corporate bonds, especially new public offerings, on the Dow Jones ticker. Every time there was a bond sale, I would call up the manager of the syndicate of investment banks selling the securities to find out what had happened. He would invariably say, "Oversubscribed, and the books closed," which would be duly noted, along with the selling price, on the ticker. The bonds were always quickly snapped up by institutional investors and others in the know. I had only the thinnest understanding of how any of this worked, but I dutifully wrote everything down, and no one seemed to complain.
The first ordinary person I met who regularly invested in the stock market was a guy I'll call Frankie, who was in my National Guard unit. While working at the Journal, I was still satisfying my Guard service requirement with two-week summer stints as a truck and jeep driver, upstate at Camp Drum, along with periodic training sessions at the armory on Lexington Avenue. I use the term "training session" loosely: The Fighting 69th has a robust record of combat stretching back to the Civil War, but in those days, we spent a good deal of our time on the armory roof, smoking, drinking beer, and listening to Frankie recount his days driving rich people around at his job at the Jaguar showroom uptown. Frankie always had tips that he'd picked up from his well-to-do customers. The next morning we would rush out to a broker and put down $100 on some obscure stock that, according to Frankie's sources, was all set to skyrocket. I remember watching the newspapers as one of our stocks held steady and then, right on schedule, began to rise—from $7 a share to $8 to $8.50. We rubbed our hands in expectation of the proceeds that would soon be raining down on us, delighted that through Frankie we had tapped into the magic circle of rich people who got even richer by playing the stock market. Then our stock dropped overnight, to $2 a share. On the roof the following week, Frankie was sheepish and apologetic, but unperturbed. The market went up and the market went down, he shrugged. To make money you had to stick it out. He promised to get us a new and better tip from the Jaguar buyers.
At the Journal, meanwhile, I was moved to the banking section, where I was assigned to cover mutual funds—something I'd never heard of before coming to the paper. Instead of buying shares of this or that stock, a mutual fund would bundle up a number of investments: blue-chip companies, or technology stocks, or low-priced securities that amounted to little more than fliers in high-risk markets. The mix within the fund, and its return, was the handiwork of supposedly astute advisers whose fortunes rose and fell depending on how their funds performed.
Although the first modern mutual fund was founded in the 1920s, they were rare until the postwar period and still didn't account for much in the early 1960s. At the time I was given the mutual fund beat, it was scorned by the other, more upwardly mobile reporters. As John Bogle, legendary founder of the Vanguard Group of funds, reminded me in a recent interview, the prevailing attitude was that mutual funds were for people "too dumb to do anything else"—those who didn't have the sophistication to deal in individual securities. But the old guard of Wall Street—well-bred WASPs and German Jews who viewed the whole financial world as an insiders' club—was being challenged by new firms coming into the over-the-counter market, many of them run by upstart kids from immigrant families. Some of these less hidebound denizens of the Street saw mutual funds for what they were: an opportunity to take advantage of the postwar boom and bring a flood of new, middle-class investors into the market.
I dutifully began going to mutual fund meetings, usually held at swank downtown men's clubs. There was always plenty of whiskey, high-class hors d'oeuvres, and sexy women handing out quarterly reports. Afterward, we would stagger back to our papers and write up a paragraph or two. Then, unexpectedly, I got a real story. An editor at the Journal had heard about a series of stockholder suits accusing some big mutual funds of ripping off consumers through a series of hidden fees, all appearing to come from different companies—investment advisers, sales outfits, management concerns—when in fact all were part of an interlocking network.
Fees have always been one of the built-in scams of mutual funds, which charge investors for managing, operating, and even marketing and advertising the fund. On average, the fees add up to 1.5 percent of the value of an account, but they can run as high as 3.5 percent a year. This means that a fund showing a 7 percent gross return has a net return to investors of 3.5 percent after taking into account the 3.5 percent fee. As Rep. George Miller (D-Calif.), chairman of the House Committee on Education and Labor, put it during a February hearing on retirement security, "Wall Street middlemen live off the billions they generate from 401(k)s by imposing hidden and excessive fees that swallow up workers' money. Over a lifetime of work, these hidden fees can take an enormous bite out of workers' accounts."
Congress, of course, has known about this scandal for years, and has periodically floated legislation to limit certain types of mutual fund fees, or at least demand full disclosure. Committees have held hearings, the Government Accountability Office has produced studies, and the Securities and Exchange Commission (SEC) has paid a good deal of lip service to the matter. But in the more than four decades since those first stockholder suits, through Republican and Democratic administrations alike, no meaningful changes have been made. Instead, the most significant challenge to the mutual fund fee rip-off has come from inside the industry, through John Bogle's invention of the index fund.
Bogle's Vanguard funds gave the lie to the fee scam by replacing the vaunted genius of the mutual fund manager with a computer that constantly evaluates the value and trajectory of different funds; his average fees are 20 percent of the industry average. (In the same spirit, the Chicago Sun-Times has in recent years had a monkey picking stocks. The monkey's four-year streak of beating the market was broken in 2007—but he still managed to outperform some major financial advisers.)
The Journal eventually fired me, and I couldn't blame them: I didn't understand mutual funds, and I barely understood stocks, bonds, or banking—save the ever-present dread of a bounced check. So I went to London, where I worked as a waiter in a mod coffee bar in North London to supplement my freelance work for the London Observer. But even there, I couldn't shake the mutual fund jinx. Right away I was dispatched to Edinburgh to cover the annual meeting of a new mutual fund company. The scene was just like the one in New York, except that the whiskey was older, the girls were younger, and the financial jargon was dished out by smiling Scotsmen whose accent I could barely decipher. Their message, as far as I could make out, was just like the New York executives', too: Mutual funds were just brilliant because they pooled resources and spread out risk, allowing ordinary lads to partake in the bounty of the market.
On both sides of the Atlantic, mutual funds at this point were promoted as a way to democratize investment. Never mind that what made the funds accessible to the common man and woman—the fact that they mixed together an ever-changing stew of financial instruments and then ladled it out in affordable portions—also made them inscrutable to most investors (and most elected officials as well). No one seemed to know what might be buried in those funds—and no one seemed to care. It was the perfect manifestation of J. Paul Getty's adage: "Money is like manure. You have to spread it around or it smells." And mutual funds were about to start really shoveling it—courtesy of the US government.