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Bogle: Unclear if Target-Date Funds Have Lived Up to Promise

Christine Benz

Christine Benz: I'd like to discuss whether you think there have been any beneficial investing innovations, maybe talk about target-date funds in particular as being something that at least on the surface appears to be something setup to address a real investor need?

John Bogle: Well, most innovations in the financial field are innovations of benefit for the innovators. They benefit the creators of them, the marketers of them. Wall Street benefits from most innovations and investors do not. So, when I think about investors, this is going to be a little bit self-serving, partially of the innovations in the mutual fund industry, let's say for a minute. Certainly the money market fund is one. Although where the money market fund stands today with yields that you can barely find a tenth of 1% is probably what the yield in the money market fund is. That was an innovation.

I happen to believe that the Vanguard structure, the truly mutual, mutual fund – this industry carries around mutual fund, mutual fund, mutual fund. There is only one mutual fund group in the 500 firms in this business. All the rest are non-mutual, they run for the profit of the managers. And so, I think the mutual structure was a great innovation.

I happen to believe as you can probably imagine that the index fund was one of the great innovations. I happen to believe that this strategy of bringing out bond funds with defined maturities, which goes back into the mid 70s was a great innovation. You should chose between short, intermediate, and long, or all, all those choices are okay. It depends on what you want. It was a good innovation, not just the bond fund that someone was going to try and manage, because you can't manage bonds anymore. They can manage stocks to advantage, at least most investors can, and of course, the cost just overwhelm now. We could talk a little bit about that.

I happen to think that very much in the news this last couple of weeks, I think our innovation back in 1992 of Admiral shares, priced lower for larger shareholders. With me it seems so simple and it seemed to me simple at that time, let's give the people who are bread and butter a price break. Duh. Another big innovation.

I am pressed beyond that. Target-date is a great fundamental idea, but it's implemented in so many different ways that it requires really a lot of either investment advice or investment understanding on the part of the investor to do that because all target-date funds are not equal. They are not equal in the amount they have in stocks versus bonds at these various stages, not equal in the amount they have in international. Some of them are using things that I think shouldn't be in there.

I like the idea of a target-date fund obviously that has index components to it and that's got to be the winning strategy for the long run and target-date funds as everywhere else.

So it remains to be seen, and I know the SEC is trying to get some language in there that apparently nobody likes and trying to standardize a platform, if you will, when there are all these different forces and all these different firms trying to it differently. And I don't think they should be stopped from doing it. I think they should make it clear what they are doing.

So more disclosure, but we know that the more disclosure, the less it gets read. So target-date funds, I think it remains to be seen whether they will live up to their promise.