Jack Bogle deserves a great deal of the credit for the overwhelming growth of 401(k) plans as the most important vehicle for retirement saving in the private sector.
All of the investment world recognizes Mr. Bogle, who died on Jan. 16 at age 89, as the creator of the indexed mutual fund and the founder of the Vanguard Group. But through the indexed mutual fund he helped spark the 401(k) revolution. Likewise, the 401(k) revolution helped drive Vanguard's growth into a firm with $4.9 trillion in global assets as of Dec. 31.
The indexed mutual fund made it possible for employers to offer employees in their 401(k) plans a broadly diversified stock portfolio at very low cost, especially as the Vanguard index fund was a no-load fund at a time when many equity funds carried either front-end or back-end loads and high management fees.
Low costs meant employees kept more of their investment returns and their portfolios grew faster than they would in most actively managed equity funds, only a few of which were able to outperform the Standard & Poor's 500 index in any given period after fees and trading costs.
Three financial companies had introduced index funds for defined benefit fund clients before Mr. Bogle introduced the indexed mutual fund for individual investors in 1975. Initially derided as "Bogle's folly," the growth of the first Vanguard mutual fund initially was slow because defined benefit plan sponsors generally did not like to use mutual funds to manage their DB assets.
But the mutual fund was an excellent vehicle for individuals in self-directed defined contribution plans, and the low-cost indexed mutual fund was a perfect offering to employees. As companies abandoned defined benefit plans and adopted 401(k) or other defined contribution plans, indexed mutual funds became key investment destinations, and Vanguard prospered.
Vanguard's low costs forced other mutual fund companies to lower their fees and to start competing index funds, to the benefit of all defined contribution plan participants and other individual investors.
Their enormous growth has forever changed the business of money management.
However, Mr. Bogle was realistic about the possible dangers of the wave he had created and warned that in the not far distant future a handful of index fund managers could gain enormous power over U.S. companies through their corporate governance activities. He was aware that his invention is continuing to change equity investing and contemplating ways to have it continue to function effectively.
Mr. Bogle's willingness to consider the consequences of his work and brave the scorn of the investment world to do what he thought was right for investors made him a financial industry hero. He will be missed.
