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By Christine Benz | 06-13-2013 12:00 PM

Bogle: The Problems With 401(k)s

The 401(k) is really a thrift plan that we've tried to redesign into a retirement plan, and it needs to change, says the Vanguard founder.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. I'm here at the Morningstar Investment Conference.

The 401(k) industry has increasingly come in for harsh criticism. Joining me to discuss whether that criticism is founded is John C. Bogle. He is the founder of the Vanguard Group.

Jack, thank you so much for being here today.

John C. Bogle: Always good to be with you, Christine.

Benz: Jack, you always have a lot of opinions, all of them interesting. I'd like to get your take on the 401(k) system. You recently appeared in a Frontline PBS special that really suggested that the 401(k) system ought to be dismantled. What's your take on that assertion?

Bogle: Well, on the Frontline, I appeared in that show, and I was telling people the truth about costs was the essential part of it, and how to capture your fair share of market returns. They did a very good job on that to be honest. I thought it was little bit like many things we see in the press and on television--a little bit sensational at the beginning. You can talk all about how people's retirement funds disappeared almost during the market crash of 2007-2009, but that isn’t everybody. But television will make it look like it's everybody. So it's certainly slanted and probably oversimplified, and probably not talking about the things that are good about the retirement system.

The essentials are that people ought to save more. It's pretty easy to say, and not so easy to do. Save more and invest intelligently.

Now the problem with 401(k)s are a couple. The big one for me is, it's a thrift plan that we've tried to redesign into a retirement plan. It was never created, the 401(k), to be a retirement plan. So you have all kinds of things that you would not put in a retirement plan, like the ability to take out money when you want to by borrowing, and the ability to make capital withdrawals under certain reasonably extreme circumstances. The ability to take all your money when you move from one job to another, as so many people in America do today. And all that flexibility and letting you have access to your accumulated capital is a terrible way to build up a lifetime retirement plan. It can't be done if you exercise those things.

The fact of the matter is, for example, if needy people could go to their Social Security account and withdraw money whenever they needed it, then they wouldn't have any retirement capital at all.

So, that's what needs to be fixed. Number one, to fix it, to make a little more, shall we say, rigid and less flexible.

Benz: But people are unhappy about the limits that are already imposed on withdrawals prior to retirement age.

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