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401k & Retirement Advisers Shocked by, Sympathetic to and Cynical of Bogle Comments

July 01
01:20 2014

The Wall Street Journal recently reported some comments John Bogle made at the Pensions & Investments conference in New York. The article cited Bogle as being in favor of “a federal body to approve products” offered to the retirement 1088028_19926489_high_voltage_stock_xchng_royalty_free_300industry. Bogle said, “There should be a federal body – a ‘Federal Retirement Savings Board,’ you could call it – that determines entrants. Furthermore, the paper wrote that Bogle envisions this “body could have the power to rule out high-cost or high-turnover products.”

John Bogle, the founder of the index fund movement, has made a name for himself fighting against the establishment. Indeed, he’s a hero to many for his stand in favor of a Universal Fiduciary Standard. With that in mind, asked 401k and retirement advisers from all corners of the nation for their thoughts on Bogle’s comments. While at times sympathetic, Bogle-heads may be shocked by their frank responses.

General Agreement on the Basic Problem

First, the good news. There is a general agreement that things aren’t perfect. The nut is figuring out a way to fix it. For example, Bloomberg recent ran an article on the dangers of taking retirement money out of a company plan and rolling it over into an IRA. The article implied this should rarely be done. In fact, while these rollover dangers certainly exist (especially in the absence of a Fiduciary Rule covering IRAs), it is equally true that keeping your retirement assets in the plan of a former employer is danger both to the ex-employee as well as the plan’s sponor. According to the Wall Street Journal, even Bogle admits “The trouble with the system is you can’t write the perfect rule.”

Mathew Dahlberg, Owner of 111th Street Investments in Kansas City, Missouri, thinks Bogle “genuinely cares about the Main Street investor. To be sure there are a lot, unfortunately, of bad actors in this industry, and of course there are also some inexcusable fees.” Dahlberg, though, isn’t quite comfortable with the idea of ceding the freedom to pick and choose one’s investments over to the government. He says of retirement investors, “I try to apprise them of the academic research and I offer my professional opinion but in the end they have to decide for themselves. Why can’t the government, and ultimately we as a society, take the same approach?”

That Bogle brings up a relevant issue is beyond question. Duncan Rolph, Partner and Managing Director of Miracle Mile Advisors, Los Angeles, California says, “Wall Street investment firms have a history of lining their own pockets at the expense of their clients through charging high fees, pushing proprietary products, or simply by giving bad advice. As pensions become a thing of the past, ordinary investors are left to fend for themselves and the results don’t look very promising given the average American nearing retirement has saved less than $30,000.”

But Leery the Motives

“While I respect Mr. Bogle for his contributions to the investing public, I think this proposal is a bit short sighted,” says Kurt Cambier, Senior Partner at Centennial Capital Partners in Littleton, Colorado. He sees Bogle’s proposal as merely misdirected, but on the right track. “I think Bogle is frustrated over the poor performance that many investors have experienced. Some of that can be attributed to the high cost of the things they invest in. I, too, share a concern over the undisclosed costs of many of the investments people put their life savings in. The way to fix the problem is through more public awareness. Yet I favor education over legislation.

Others aren’t so charitable and question the motives of Bogle’s comments. “It would appear that Bogle is merely proposing legislation and regulation that would place his company and other large money managers at a competitive advantage and, therefore, increase their market share,” says Pete Lang, President of Lang Capital in Charlotte, North Carolina. For those who don’t want things sugar coated, Lang is quite frank. He says, “Bogle now proposes legislation aimed at requiring retirement accounts to invest in low cost low turnover index funds.  Bogle’s proposed regulation is nothing less than a shameless attempt of manipulating our government into a policy aimed at increasing his own market share.”

Others share Lang’s skepticism. Rolph says, “The appointment of a federal overseer to put a stamp of approval on specific investment funds and deny others with high fees or active management would end up making Vanguard the only game in town.”

Mark Carruthers, an independent financial planner based in Congers, New York, says, “The overall concept John Bogle is recommending may be good in theory, but self-serving if nothing else.” Beyond Bogle’s conflict of interest, Carruthers points to an aspect of the proposal which troubles many: giving the government the power to dictate which funds are allowable investments and which funds aren’t. “We live in an era of big government. Plain & simple. However, getting them to approve or oversee what products are used in retirement plans is a bit ridiculous. They have enough difficulty with their own financial affairs.”

Lessons In Free Market Theory

The concept of anything involving the government elicits the most cynical of responses. “Seriously….the government which cannot balance or even create a budget? The same government (DOL) that is allowed to keep postponing fiduciary guidelines?” poses Colin Fitzpatrick Smith, President of The Retirement Company, in Wilmington, North Carolina. In fact, he feels we don’t need any more government involvement because existing laws and regulations already do what Bogle is suggesting. He says, “Investments, for example, open end mutual funds, have already been pre-approved by the government as evidenced by the Investment Company Act of 1940.”

David Reischer, an attorney specializing in estate & financial planning at Reischer & Reischer in New York City, says “government involvement into retiree planning will lead to inefficient allocation of capital.” Reischer explains how this is fundamentally opposed to the free market economics upon which our capital markets are based. He says, “When a federal overseer intermediates what specific asset-management products are appropriate for an individual then the interests of the collective may not only supersede the interests of the individual, but it disrupts the entire supply/demand dynamic inherent in price discovery.”

For those who don’t fully appreciate the implication of government intervention in a free market, Dahlberg spells it out in no uncertain terms. He says, “I would be quite skeptical of any government’s attempt to essentially ‘choose’ any winners amongst the various investments in the asset management world. At its core, free market theory dictates that any artificial demand placed on a product, in this case being artificial demand due to government diktat, causes an increase in price. An increase in price when dealing with investments of course means a decrease in return on those same investments. I’m not sure it is wise that the government skews the risk-return equation of any investment product, as this could ultimately encourage low returns in the accumulation stage of an investor’s life.”

The Problem with the Politics

Not only do we have the problem of disturbing the free market, we also have the political consequences of the subjectivity of (and even the relevancy of) such terms like “high fees” and “high turnover.” Reischer says, “High turnover and high cost products usually indicate very active management. Although there are usually higher fees for this wealth management strategy, it is usually acceptable to clients if an active manager is outperforming the market. The terms ‘high turnover’ and ‘high cost’ are subjective because active managers may turnover their portfolio and also charge high fees in compensation for managers having to exert such extra efforts. Regardless, if the portfolio outperforms the market, then clients will be willing to have ‘high turnover’ and ‘high costs.’ Over-sized returns and final performance are the best measuring stick for making clients happy not some arbitrary rule or metric established by government.”

Moreover, there may be tax advantages for placing high turnover vehicles in retirement plans. Rolph says, “Ruling out high turn-over funds in retirement accounts really doesn’t make any sense if you think about it. Retirement accounts are tax deferred by definition so, within a larger portfolio, investors should actually locate their higher turn-over funds in their retirement accounts since they won’t be subject to the higher tax liabilities. Saying there is no place for ANY investment strategy that results in security turnover is not logical.”

It is the fixation on fees, specifically, mutual fund expense ratios, that raises the most questions. Cambier says, “The true cost of any portfolio is not the difference in the internal fees, but the difference in the net results that the client receives. It is very true that in times of market advances, when the wind is at your back, having a low-fee/low-drag portfolio would be highly beneficial. Conversely, the wind often is in the face of the average investor and a more active, perhaps more expensive portfolio may actually provide a higher net return. Let’s look at the last 5 years as an example. A passive low-cost strategy like Bogle’s Vanguard funds performed very well.  However, go back 10 years when the market saw some serious turbulence and many of the more expensive active tactical strategies significantly outperformed those of the low cost passive variety.”

Ironically, Cambier cites Vanguard own research to refute Bogle’s fee assumption. “In Vanguard Funds own white paper titled ‘Putting a Value on Your Value’ – Quantifying Vanguard Advisers Alpha, they compared Vanguard fund investors who did  it themselves to Vanguard fund investors who use the same funds but paid a fee for the advice of a competent financial adviser. The result was the investors receiving the guidance from the financial adviser significantly outperformed the lower cost go it alone approach. Poor irrational investor behavior is the biggest factor in the success of failure of that investor, not the fees. Many times a more expensive active portfolio helps keep the investor on track. Still, all fees and cost should be fully disclosed so that the investor can make a more educated and informed decision.”

Along these lines, Rolph questions the focus on fees rather than self-dealing. “Ruling out high cost funds is subjective to say the least,” he says. “There are literally tens of thousands of investment funds available to the public; it is clearly an efficient market. The problem arises when fund companies (including Vanguard) try to act as ‘advisors’ when they are essentially selling their own product. Why don’t we focusing on eliminating this conflict-of-interest by separating the advisors from the sales companies?”

Cynicism Towards the Government

Speaking of conflicts-of-interest, Reischer exposes a rather large one should the government take on Bogle’s overseer role. He says, “Political interests may require investors to purchase government bonds or other such government instrument if it would suit government purpose. As government debt increases (the US debt now stands at over 17 trillion), there is an incentive for government to have retirees buy government debt. It would not surprise me if Bogle envisions a period when retirees are told that it is prudent to buy US Treasuries and other government paper to help finance US deficits.”

Dahlberg uncovers the real problem of relying on government legislation and yet another regulatory branch when he says, “What is needed is more investor education, more disclosure, and perhaps a more unified securities industry regulatory framework. Hard and fast rules created by a very removed central government, however, will only create winners and losers, lead to more lobbying to create those winners and losers, and lead to fewer choices for investors. I’m not sure that Bogle would agree that this is a good outcome, either.”

Finally, and at the heart many readers of, comes the whole idea of the government acting as a de facto fiduciary for retirement investors. Reischer says, “A traditional estate planner or wealth manager is in the best position to look out for retiree interests. I do not think investors would have greater trust if the government was the investment fiduciary because there is an inherent conflict-of-interest with the government acting in such a role.”

Recent events in Washington makes suggesting the government take on this fiduciary role even harder to sell to the general public. Cambier says, “In an era where the public opinion of the Federal government is at an all-time low, I cannot think of anyone who wants more government involvement in their lives. In a time period where IRS officials take the 5th and somehow pull off the impossible by losing any evidence of the existence of emails, I cannot think of a worse entity to have fiduciary powers. Put the responsibility in the hands of the public and their financial advisor whom together have some skin in the game. The government has a history of running and hiding, ducking any responsibility for what might go wrong.”

Indeed, is it possible – and correct – to say that it’s not in the best interests for the government to serve as sole fiduciary? Dahlberg says, “I doubt that most of my clients would have greater trust in the government if it was a fiduciary to them. How would the government be accountable to them? If I break my fiduciary duty to a client then they have a recourse with the courts and the legal system, not to mention the fact that my name and firm reputation would suffer. What would an investor do in case of breach of fiduciary duty by the government, sue the government? Change their fiduciary?”

We’ve Already Got the Solution

In fact, as Rolph says, the government already has a mechanism to ensure the best interests of investors are always addressed first. “Registered Investment Advisors (RIAs) are already held to a fiduciary standard and regulated by the SEC so instead of creating another government fiduciary,” says Rolph. “Why not simply implement and enforce the fiduciary standard across the entire industry by holding stock brokers to a higher standard?”

Although many advisers are critical – and sometimes harshly critical – of Bogle’s comments, most probably share the sentiments of Holmes Osborne, Principal of Osborne Global Investors, Inc. in Santa Monica, California. He says, “Bogle has his heart in the right place but his suggestions are redundant. In today’s retirement plans, most have an option of an index fund or at least a reputable fund company. It’s true, there are still some bad plans out there, but, as time goes on, most are falling by the wayside. Fees are coming down and fund choices more robust.”

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Phil Chiricotti
    Phil Chiricotti July 01, 18:05

    Brilliant. Unfunded liabilities at the federal level are close to $200 trillion, more than $1 million per household. The state and local governments have similar problems. Politicians never make hard decisions and these liabilities are nothing less than nation threatening. Social security is not even held in a real trust. Giving these same policymakers control over private retirement plan assets could be devastating over time. Fiduciary standards do not apply to federal, state or local governments. If they did, the offices would be empty.

  2. Dennis Myhre, AIC
    Dennis Myhre, AIC June 03, 20:08

    We need to assign fiduciary enforcement responsibilities to one agency, and make the plan service providers liable, not the plan sponsors. Blaming some employer because a service provider stole hundreds of millions of dollars from plan participants is asinine. If a car manufacturer builds a defective automobile, we don’t blame the dealership that sold the car. NHTSA tells the manufacturer to make it right. The FDA regulates consumer products through enforcement. If a drug company messes up, we don’t blame the pharmacist.

    The problem with the 401k marketplace today is that so many investment providers are involved in self-interests that they don’t want the service providers to be fiduciaries, even though they ARE the problem. Once that mentality dissolves, the industry will right itself. If we continue to self deal in issues that involve fiduciary responsibility, the ship will sink, and everyone will lose.

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