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Bogle: U.S. faces 3 retirement ‘train wrecks’

Vanguard founder rains criticism on industry at Morningstar conference

Jack Bogle
Vanguard founder Jack Bogle

The U.S. is facing three retirement “train wrecks”: the growth of social security entitlements, “grotesquely underfunded” pension funds, and the structure of defined contribution plans, Jack Bogle, founder of the Vanguard Group, said Thursday at the 25th annual Morningstar Investor Conference in Chicago.

Underfunded defined benefit pension funds, Mr. Bogle said, are not going to be able to consistently achieve the required 8% annual return they need. Defined benefit plans are simply going to need bigger contributions going forward.

Mr. Bogle also argued the need to “clamp down on withdrawals” from defined contribution plans. “The 401(k) is a thrift plan, but we've made it into a retirement plan,” he said. Restrictions on early withdrawals from 401(k) funds are necessary to ensure savings in retirement, he said.

Turning to the money management industry, Mr. Bogle said firms owned by larger financial institutions inherently “serve two masters,” that is, investors and corporate ownership, and that “the one paying the bills” (owners) will always win out.

Mr. Bogle also criticized the lack of accountability that managers have shown regarding corporate governance. Through mutual funds and institutional clients, Mr. Bogle said money management firms own up to 50% of the stock in corporate America.

“Managers control corporate America, and corporate America needs a lot of cleanup,” Mr. Bogle said. Two examples he noted were manager compensation and corporate charitable giving without proper shareholder approval.

“Corporate America shouldn't be allowed to operate as their own private fiefdoms for their executives.”

And during a discussion with Don Phillips, president of investment research at Morningstar, Mr. Bogle criticized the Securities and Exchange Commission's proposal to impose a floating-share value on only prime institutional funds — the riskiest money market funds — that invest in short-term corporate debt. The proposal would not apply to funds that hold 80% in cash and government securities (or those collateralized by government securities).

It's a King Solomon-type decision to “split the baby in half,” Mr. Bogle said. “They should either do it or not.”

“The fact is that money market fund net asset values fluctuate, and (the money management industry doesn't) want people to know.” The industry, he said, has to stop protecting its own interest and focus on shareholders.