America is facing a retirement crisis.
Over the past few decades, employers have slowly shifted responsibility for saving to employees rather than managing money directly for them and guaranteeing a payout in retirement.
Many Americans don’t know how much they need to save or the best ways to go about it. And about 60% of Americans have no savings in retirement accounts like 401(k)s or IRAs, according to a 2016 government study.
The Obama administration last year passed a rule meant to protect retirement savers from unscrupulous financial advisers, but that new regulation might get rolled back under President Donald Trump.
Business Insider recently interviewed John C. Bogle, the founder of Vanguard, which transformed investing after it introduced the world’s first index fund in 1976. Index funds allow ordinary people to invest in the market for very low fees by passively tracking a market index — in effect allowing people to save money for later without paying the high fees associated with active managers like traditional mutual funds.
Bogle says the US retirement problem isn’t just related to the types of investing available to Americans — it’s also structural. Here’s an excerpt from what he told us in the interview (emphasis added):
Rachael Levy: You’ve said the 401(k) model in the US is broken. How so?
John C. Bogle: At first, the 401(k) was designed to be a thrift plan, an extra, a savings plan. It was never designed to be a retirement plan. You can see it in its very structure. There’s no requirement to put money in, no requirement to pull it out. It’s too flexible. There ought to be more discipline in it. I don’t know exactly how to do it. I don’t know the exact implementation of it.
The same thing is true of the IRA. It’s very flexible, and I think that should be tightened up, too, but particularly the 401(k) and 403(b). They both have a lot of flexibility and, in a lot of cases, too much cost.
[Editor’s note: A 403(b) is what nonprofits often offer employees to save for retirement and is similar to a 401(k).]
Levy: I’ve seen you raise questions about target-date funds, too, because they don’t take into account Social Security.
Bogle: What we’ve seen develop in the 401(k) area is more and more use of target-date funds. They’re fine, but I don’t think they’re a panacea. It remains to be seen whether the age-based system does better than other systems. We just don’t know and there’s no way to know. These things depend not only on what the market does but when it does it. If you have a big loss early in your retirement plan, recovery from that is very different than if you have a big loss later on.
We then asked whether there were any retirement models elsewhere in the world that made it less easy for people to redeem from their accounts. Here’s what Bogle had to say (emphasis added):
Bogle: The Australian model, “superannuation” as they call it there, is a very good model. It requires discipline. Money goes in regularly every month. Believe it or not, it’s something I had myself here when I started at Wellington Management Company back in 1951. It was a defined-contribution pension plan. Fifteen per cent of my salary was put in every two weeks, and I couldn’t withdraw it, and I’m not sure our investors are up to that kind of inflexibility in having to wait.
There ought to be restrictions, much more serious restrictions on taking your money out. You need discipline putting it in and the limits on pulling it out. We need more structure around the 401(k) if it’s to take its legitimate place as retirement plan, rather than just a thrift plan.
Bogle isn’t the only one to bring up America’s retirement problems. Larry Fink, the CEO of BlackRock, a huge player in passive investing, highlighted these issues in a note sent earlier this week, also suggesting that the US consider a model like Australia’s.
Here’s what Fink wrote (emphasis added):
“Finally, as major participants in retirement programs in the U.S. and around the world, companies must lend their voice to developing a more secure retirement system for all workers, including the millions of workers at smaller companies who are not covered by employer-provided plans. The retirement crisis is not an intractable problem. We have a wealth of tools at our disposal: auto-enrollment and auto-escalation, pooled plans for small businesses, and potentially even a mandatory contribution model like Canada’s or Australia’s.
Another essential ingredient will be improving employees’ understanding of how to prepare for retirement. As stewards of their employees’ retirement plans, companies must embrace the responsibility to build financial literacy in their workforce, especially because employees have assumed greater responsibility through the shift from traditional pensions to defined-contribution plans. Asset managers also have an important role in building financial literacy, but as an industry we have done a poor job to date. Now is the time to empower savers with new technologies and the education they need to make smart financial decisions. If we are going to solve the retirement crisis — and help workers adjust to a globalized world — businesses need to hold themselves to a high standard and act with the conviction that retirement security is a matter of shared economic security.”