From the October 2012 issue of Investment Advisor • Subscribe!

September 25, 2012

Vanguard Founder John Bogle on Restructuring the Retirement System

John Bogle is still as “no-nonsense” as ever at 83. We have the pleasure of hosting the investing legend and Vanguard founder at this month’s 2012 Retirement Income Symposium in Boston on Oct. 4 and 5. He’s out with a new book, “The Clash of the Cultures,” his 10th book overall and seventh in 10 years. In a recent interview celebrating the book’s release, he said it would probably be his last. Don’t bet on it.

The index investing pioneer is just as passionate as ever about the need to put clients first, sounding off about the “hot, new products” that help the financial services industry reap high fees, while doing little for, and often harming, the investors they’re supposed to protect. For that reason he’s looked upon as the conscience of the industry, even criticizing the firm he founded when he feels it’s gone astray. You might disagree with his stance on the benefits of active versus passive investing, but it’s tough to disagree with much else.

Bogle sat down with Investment Advisor for a review of his book and a preview of his session in Boston.

ETFs were supposed to address many of the complaints about mutual funds, especially in the wake of the market timing scandal of 2003, but you are very hard on them in the book. Why?

I don’t think that’s a fair representation of what I say in the book. I like certain ETFs; the S&P 500 products, for instance, or the Total International stock index. But products like the three-times leverage or commodities products that are clearly speculative—it’s not so much the products, but rather how they are used. Buy-and-hold is good, but trading them is a loser’s game. You can trade the S&P 500 all day long, but what kind of a nut would want to do something like that? A new Vanguard study finds that ETF owners are less likely to be buy-and-hold investors.

In the book, you argue for restructuring both public and private retirement systems. How?

We need a unified retirement system, not four or five different tax-advantaged systems. It’s crazy to allow people to borrow from their retirement plans, to take loans from them and cash them out when moving from job to job. I understand we are Americans, and we like our individuality, but that simply doesn’t work when planning for a successful retirement.

You also address “the necessity of transparency to establish effective market regulation to empower investors.” Will Dodd-Frank do that?

Dodd-Frank is riddled with compromises before it will ever take effect. The nibbling away will result in less enforcement.

Author and AEI fellow Peter Wallison has called for a UIT model for investment boards, similar to what they have in the United Kingdom. Would that help?

Right now we have a sort of “pathetic balance” with board oversight and potential conflicts of interest. If I understand Peter, his suggestion would do away even with that. The British system is insane. Look, I’m a believer in the free market, but not in some smooth-talking salesman peddling a product with high fees. People lose sight of the fact that [fund] expenses are everything. Lower cost is the way to go. Morningstar has even said to go with lower cost rather than using their system, which is a big concession on their part. Stewardship is key in this day and age. We have all this talk of fiduciary; well, the 1940 Investment Adviser Act already had explicit fiduciary language in it. What else can they do, say, “We mean it this time?”

Reprints Discuss this story
This is where the comments go.