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By Christine Benz | 10-18-2012 08:00 AM

Bogle: U.S. Retirement System a 'Train Wreck'

Vanguard founder Jack Bogle warns of the significant problems in the defined-benefit and defined-contribution spaces and suggests solutions to get retirement planning back on track.

Christine Benz: The last thing I would like to cover with you, Jack, is our retirement plan system. I think we can agree probably that we have this looming catastrophe with people so far undersaved for retirement, the great 401(k) experiment for many folks has not gone well at all and you do discuss the retirement system in the book [The Clash of the Cultures]. Let's discuss from your viewpoint where we've gone wrong and what steps we can take to get things back on track?

Jack Bogle: In the book I call that with typical understatement, "a train wreck" or "a coming train wreck." Let me take it in two sections, one is the defined-benefit area, the pension area, which as we all know is shrinking, but still these pensions, state and local as well as corporate, are assuming almost universally 8% returns in the future. In a standard portfolio that we talked about earlier, stocks give you 7% and bonds give you 2.5%. Their returns on the market side of a balanced portfolio, a very important point, are going to be, let me say 4%. And then you're going to pay for that, and you're probably going to pay 1.5%.

So now you're down from 4.0% to 2.5%. You said 8%; it doesn't wash. And there are ways to get around it. Buy hedge fund managers--unproven and seemingly not doing so well. You can go private equity. It's never been a license to steal for the investor. So much money comes out of the private equity system. The people that are in it make an awful lot of money, but as always the client comes last. So the 8% is not going to happen. I say that absolutely unequivocally. So we a have a big thing to fix there, and it's going to cost corporations a lot of money at some point. They keep pushing it, and I'll say kicking the can down the road. But the 8% still stays there in the face of overwhelming evidence, but it's a joke. And so [the defined-benefit plan managers look to] speculation to get 8%, speculation over investment again, and they're doing more and more of that, more and more private equity, more and more hedge funds. And it has to end badly unless the corporations just say "Stand up and take the loss."

On the defined-contribution side, the biggest problem is, I don't know why there's not enough awareness of this. . .  By the way a defined-contribution plan has been available since the beginning of time. I had been in one from the day I started at Wellington Management Company in 1951, put 15% of my pay away in Wellington Fund, and I've been doing it ever since. It's worth a lot of money. I couldn't help it. Low-cost funds, conservative mostly, equity-based at the beginning, bond-based at the end. So it's not very complicated. But in 1982 when we had the 401(k) ruling, that was to create a thrift plan for employees. You can't turn a thrift plan into a retirement plan. I know we're trying to, but it's still much too easy to take money out, much too easy to borrow against, much too easy when you get fired or move on to another job to take the proceeds and not roll them over, but buy some other things you need or want for a long time.

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