John Bogle was the founder of Vanguard Group and a well respected investment mind. He has written several good books including: The Little Book of Common Sense Investing, Common Sense on Mutual Funds and Bogle on Mutual Funds. This interview from 2006 discusses the state of the retirement system, before the credit crisis.
Frontline: How do they get away with that? Don’t they have to fund them?
John Bogle: No, they don’t, because a lot of it is based on assumptions. Our corporations are now assuming that future returns in their pension plan will be about 8.5 percent per year, and that’s not going to happen. The future returns in the bond market will be about 4.5 percent, and maybe if we’re lucky 7.5 percent on stocks. Call it a 6 percent return — before you deduct the cost of investing all that money, the turnover cost, the management fees. So maybe a 5 percent return is going to be possible, in my judgment, and they are estimating 8.5 percent.
Why? Because when they do it that way, corporation earnings become greatly overstated, and all the executives get nice, big bonuses. They are using pension plan assumptions as a way to manage corporate earnings and meet the expectations of Wall Street.
Frontline: So if a company overstates the value of its pension plan assets, it makes the company look better to Wall Street, so there’s an incentive to kind of exaggerate, if not cheat.
John Bogle: That is precisely correct. And let me clear on the cheating: It’s legal cheating; it’s not illegal cheating. In other words, you can change any reasonable set of numbers — and corporations have done this, have raised the pension assumption from 7 percent to 8.5 percent — and all of a sudden that corporation will report an earnings gain for the year rather than an earnings loss that they would otherwise have. Simple, legal.
The entire PBS series (from 2006) on 401(k)s (including interviews with Elizabeth Warren, David Wray and Alicia Munnell) is worth reading.
In February of 2009 he spoke to the House of Representatives committee exploring retirement security.
Exactly right. People are choosing to spend today and sacrifice their futures.
Again exactly right. Some seem to think that because the stock market has reduce the balance of IRAs and 401(k)s somehow shows that this model of retirement savings is bad. I completely disagree. The return on investments has nothing to do with which model of retirement savings is preferable. If companies were responsible (as with pensions) then they would be suffering not only from the credit crisis, and the economic decline created by it, but from huge burdens to pay for declining balances of their investments to pay off pensions.
401(k)s put a person’s retirement where it should be, in the control of that person. My retirement should not be tied to long term (like 20+ year) employment at 1 company. That works ok, for those few people that have such an employment history. But the portion of those who have such long term employment continues to decline. And I should be able to save 25% of my income and retire early if I want. Pensions don’t allow for me to decide how much I want to save, or for how many years I want to work, or for how many companies I chose to work for.
Part of the reason for today’s modest accumulations are the inadequate participant and corporate
contributions made to the plans. Typically, the combined contribution comes to less than 10
percent of compensation, while most experts consider 15 percent of compensation as the
appropriate target. Over a working lifetime of, say, 40 years, an average employee, contributing
15 percent of salary, receiving periodic raises, and earning a real market return of 5 percent per
year, would accumulate $630,000. An employee contributing 10 percent would accumulate just
Nearly 20 percent of 401(k) investors in their 20s own zero equities in their retirement plan, holding, instead, outsized allocations of money market and stable value funds, options which are unlikely to keep pace with inflation as the years go by. On the other end of the spectrum, more than 30 percent of 401(k) investors in their 60s have more than 80 percent of their assets in equity funds. Such an aggressive allocation likely resulted in a decline of 30 percent or more in their 401(k) balances during the present bear market, imperiling their retirement funds precisely when the members of this age group are preparing to draw upon it.
He just continues to provide great thoughts.
Agreed. I do not see any reason why 401(k)s are not just treated as IRAs. Just let me invest in whatever I want instead of being limited to a very small set of items chosen by the 401(k) plan. Those often fail to include index funds. And they also do not allow me to just by individual stocks if I wish to.