Vanguard founder John Bogle, a longtime supporter of workplace savings plans, questioned whether former Republican presidential candidate Mitt Romney didn’t take excessive advantage of the tax-deferred status of his IRA.
“A certain presidential candidate turned his IRA into a private equity fortune,” Bogle remarked while being interviewed by BlackRock vice chairman Barbara Novick at a conference last week in New York City on the global future of retirement sponsored by Pensions & Investments magazine.
According to numerous published reports, former Massachusetts Gov. Romney accumulated an IRA worth an estimated $100 million during his tenure as CEO of Bain Capital, a leading private equity firm. During the 2012 presidential campaign, Bogle said he was voting for President Obama. At that time, he described himself as a “[Teddy] Roosevelt Republican,” conceding he was a member of a shrinking group within the GOP.
Though Bogle didn’t say it explicitly, it was clear that he was concerned that individuals amassing huge fortunes in IRAs and 401(k) plans might prompt legislation to limit their tax deductibility, which could conceivably limit ordinary Americans’ ability to save for retirement. Last year, there was discussion in Washington, D.C. to limit how much an individual could contribute to a qualified plan. Proposed caps of $3 million or slightly more were talked about though the proposals never went very far.
At the same time, many observers are questioning whether defined contribution plans can generate enough savings for ordinary Americans without pensions. Bogel noted that the times when many people and their employers choose to make no contributions are the worst times to do so, like 2009 when the markets were very cheap. "It's not wrong to be conservative, but mutual fund investors seem fixated on moving money at the wrong time," he said.
Like many observers, Bogle has publicly wondered if a “retirement train wreck” may be coming. Retired Americans will need income and yet the "vast majority of annuities are overpriced," he said.
Originally, thrift plans, the precursors to 401(k) plans, were never intended to be a primary source of retirement income. “We turned a thrift plan into a retirement plan,” Bogle noted. Still, for some Americans including himself, these plans have worked remarkably well.
Bogle started working at Wellington Management, which offered a thrift plan, in 1951. When he started Vanguard in 1974, the young firm had a similar thrift plan, as 401(k) plans were not available then. A change to the tax code in 1978 made 401(k) plans possible and their use became prevalent in the 1980s.
Yet he acknowledged that for folks like him who are still working at their same employers -- Bogle is 86 -- the build-up of funds can be remarkable. Bogle reminded BlackRock’s Novick that if you spend your entire life at a single employer, you are not forced to make required minimum withdrawals (RMDs). “The IRS can’t get their paws on it,” he said. Apparently, Romney isn't the only looking to minimize taxes.
Bogle jokingly suggested that most people would be well-advised to start contributing to a balanced fund like Vanguard Wellington and never look at the balance until they reached their 60s. At that point, they might want to have a cardiologist present when they open their statements. Bogle himself had a heart transplant 19 years ago.
Bogle also questioned why mutual funds don’t make more effective use of their power as giant shareholders to rein in abuses like CEO compensation. “Executive compensation is out of hand,” he said. “We are powerful and we don’t use it.”
Looking at Novick, he pointed out that BlackRock and Vanguard alone own about 10 percent of all the shares in corporate America. Throw in Fidelity, Capital Group, State Street and a few others and the total rises to more than 30 percent.
Austin-based Dimensional Fund Advisors supports 100 percent of all shareholder proposals, according to Bogle. “I don’t know why,” he said.
Novick then asked Bogle, probably the world’s leading advocate for passive investing, about his relationship with his son, John Bogle Jr., who runs Bogle Investment Management. Its flagship fund is a highly successful, actively managed, quantitative, small-cap fund that has easily outperformed its benchmark, the Russell 2000 over 14 years, though it has experienced some tough periods.
The senior Bogle said their philosophical differences have no effect on their relationship. Some of his good friends are active managers, he added, offering kinds words for AQR founder Cliff Asness. However, his gifts to his grandchildren come in the form of index funds.