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401(k) Challenges

Bogle on the Retirement Industry, 401(k)s and IRAs Today

Jack Bogle discusses why indexing works and why it was important for the financial industry. And he and Betterment CEO Jon Stein look to the future of indexing and ETFs.

Articles by Jon

By Jon Stein
CEO & Founder, Betterment  |  Published: February 22, 2019

The article below offers an annotated, abbreviated part of a conversation between Jon Stein and Jack Bogle in 2016. The words are their own as individuals, and they don’t reflect the views of Betterment. If major sections have been removed, we’ve done so for readability or because a claim was made that’s out of date or unsubstantiated.

Jon Stein: To me, there’s an interesting question about retirement plans and the amount of emphasis that we now have on them. My question is are 401Ks and IRAs, at the end of the day, really good for Americans? Do you miss defined benefit type plans?

Jack Bogle: Well, a defined benefit plan had one great redeeming feature. It expressed in very simple terms what was going on [to the participant]. You had average earnings of this amount, and you would get this amount, and that was that.

And we were all working from the other side. They’re faltering quite badly now, in terms of earning the returns [they need to meet the original] actuarial calculations. And so the big fallout with the defined benefit plan is that it’s probably, in a round number, 80 percent funded and assuming a future return of 7-8% over time. It’s called the next decade. And is not going to get that return.

Jon Stein: But isn’t that same problem in 401(k) plans and IRAs? We put the burden, then, onto individuals, so that the financial industry has the benefit of saying, “Well now we don’t have to worry about funding retirement defined benefit plans anymore.” But we still have this problem of individuals not having funded their retirements.

Jack Bogle: Well, of course, you’re right. I don’t know what you do about an individual IRA without some sort of compulsion. I suppose there are tax things you could do, maybe give them both the current tax exemption and a tax exemption from earnings.

So a combination of a rollout from the present thing, which would cost the government a lot of money, but a special benefit if you made your payments every month, something like that.

Put a little more discipline on the system. When you get to defined contribution plans, call them 401(k)s, that’s a thrift plan, and we’re trying to make it into a retirement plan, but we are not doing so. There’s too many outs, too much borrowing, too much giving a worker (who retires or leaves his job at 40) his entire accumulated capital. And the temptation. He should obviously reinvest it, or keep it in the same firm, which he can do. But he’s going to take it out for current needs. And if he’s unemployed for a certain amount of time, he’s going to have to take it out.

And Social Security is a mean discipline, because you can’t; it doesn’t matter what your circumstances are. You’re not going to get any money out of there until you become disabled, or go to your reward. And at that point, you don’t get any, but maybe your family does. But you start to, if you postpone Social Security ‘til you’re 70 or 72. I can’t remember the year.

It’s underfunded, but it could be fixed quite easily. So what do you do about – basically the corporate, and state, and local? State and local are almost all defined contribution. And there you’re going to have to get tax increases, which is going to be very difficult to do. It’s not within their capacity to demand them, because the voters have to approve. Or earn more, and they can’t do that.

So they’re going to be a real struggle.

On the defined contribution plans, mostly corporate at this point, they just need some more discipline in the system. Less easy to take money out. More requirements to put money in. There’s only so much rigidity you can do with that.

But if you use Social Security as a model, and it’s already there – you can’t say, “I’d really like to have that” – what is it now, 16 percent? Eight and eight, I guess. Eight and eight, maybe, gets taken out. “I’d like to have that 16 percent myself.” You can’t get it.

I don’t think we can go that far with the defined contribution plan, but if we could just start to look at it not as a thrift plan, which is what it was designed to be, but a retirement plan—people a lot smarter than poor old Bogle could be able to put some greater stringency in it. That’s number one.

And number two, there should be some way to keep the buccaneers out of the retirement plan business. What do all retirement plan owners, as a group, own? They own the entire stock market. Whether they own index funds or not, the index funds own – the indexers own the stock market. But all the other investors own the stock market as a group too. There’s just no way around that. And if you look at that portfolio, you’d see that. But there was a bunch of different funds with different firms, and high cost to trade with each other, and therefore lose badly. It’s inevitable. There’s no way around it.

So, I would like to say, “Indexing only.” But I think that’s probably pushing our home of the free and the brave, here, with liberty, a little further than it can be pushed. But to move in that direction.

See more of Jack and Jon’s conversation in our series. From indexing to founding Vanguard, they cover a lot of ground.

Contributing Authors

Jamie Cartwright
Content Marketing Manager, Betterment

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