At 85, John Bogle remains a leading, and fiercely positive, advocate for the long-term future of 401(k) plans. Last Tuesday he testified before – or more accurately, unloaded on - the Senate Finance Committee at its hearing on retirement savings plans. Love him or hate him, you must admit he speaks his mind. He detailed the flaws in the current regulations governing retirement plans. And he presented pointed criticism of the mutual fund industry for putting profits above fiduciary duty. His testimony is a “must-read” for anyone engaged in the debate for retirement plan reform.
Here is my take on the key points he raised in both his written and in-person testimony. For each topic I’ve added Bogle’s most incendiary quote.
Investment costs. “I now turn to the absolutely essential need to reduce the costs of investing for investors in both corporate defined contribution plans and IRAs. My message to the Finance Committee is “Little things mean a lot.”
Fees are critical. No argument from the Frugal Fiduciary. However, Bogle argues that index investing always beats active management over the long-term net of fees. I believe that actively managed investments play a critical role in market efficiency and investment managers should be free to create and market such investments as they wish. That said, plan sponsors should realize that evaluating and monitoring actively managed investments is expensive and requires professional expertise. These costs often drag net returns below market.
Structure of 401(k) plans. “…the very structure of DC (defined contribution) plans is also profoundly flawed.”
401k plans have never been true retirement savings vehicles. Current regulations allow participants to withdraw funds before retirement – through loans, hardships and change of employer. Bogle advocates tightening these provisions to restrict withdrawals. I blogged on this point last week and I agree. If we are to create true retirement plans, we need to keep wealth in the plans. Investors need to be committed to their retirement planning.
Fiduciary duty for money managers. “Fiduciary duty for all individuals and institutions who touch Other Peoples Money is an idea whose time has come. The financial industry and its lobbyists had better get prepared for it.”
Agree. Check out Bogle’s passionate writing on fiduciary duty, beginning on page 13 of his written testimony. Ouch! Bogle advocates bringing mutual fund managers under the auspices of the Dodd-Frank Act, which would require money managers to act in the best interests of shareholders. In Bogle’s opinion, lobbyists have tied up proposed DOL regulations, and brought the SEC into the regulatory loop. He argues that the money managers need to held to this standard because they “essentially run the funds that compose… the entire universe of defined contribution plans.”
Retirement readiness. “If one presumes that common sense and objective reality trump speculative data from surveys making a plethora of mind-boggling assumptions, then of course we are not saving enough.”
Agree. Bogle rightly identifies the problem. For 401(k) plans to be meaningful retirement savings vehicles we need to get more low-wage employees participating. Incentives are not particularly meaningful for those bottom 20% of households earning annual pretax income of less than $21,000. In my opinion, the greatest motivator for participation is the employer match. If 401k plans are to be the backbone of our retirement savings system, Congress needs to incentivize employers to provide matching contributions to low-wage employees.
Variable annuities. “Annuities should be run for the investor, not the salesman.”
Bogle took this shot toward the end of his spoken testimony. Annuities can be of great value for investors, but they are often larded with fees that are paid to the broker “selling” the product. Bogle is calling for more transparency and fiduciary responsibility.
Small business retirement plans. “The Federal Thrift Savings Plan is already available to any employer of any size.”
Several Senators asked about their “in-house” retirement savings plan, the Federal Thrift Savings Plan – often considered a model for retirement plans. Bogle praised it, pointing out its extremely low fees and use of index investments. Other panelists also praised the plan. Bogle returned to the TSP near the end of his spoken testimony with the above quote. As I have blogged previously, any employer has access to low-cost index investments – not as low as the TSP, but low – without any restrictions on assets or number of employees. This index investment core can be a baseline for any employer wishing to implement a small business 401k plan. Employers could possibly do better, but they should do no worse than low-cost market returns.
A final quote from the frugal Mr. Bogle:
“All of these improvements are within our reach, and it is high time we begin the long march toward their accomplishment.”