John Bogle, founder of Vanguard Group, was interviewed recently by Morningstar about the future of 401(k)s and how to fix the problem of most people not saving enough for retirement.
He made three retirement planning points that made a lot of sense to me.
First, he said that 401(k)s were set up to be thrift savings plans -- not retirement plans. 401(k) plans give savers the ability to withdraw money by borrowing and to make capital withdrawals under certain circumstances, as well as the ability to take all the money out when you change jobs. "All that flexibility and letting you have access to your accumulated capital is a terrible way to build up a lifetime retirement plan," Bogle says.
His solution is to tighten up the rules. "To fix (401(k) plans), to make (them) a little more -- shall we say -- rigid, and less flexible."
Bogle's second suggestion is to create a government-run retirement board to certify investment companies that want to manage 401(k) funds. Among the questions he would ask these investment firms: "Are you prudent investors? Are you long-term investors compared to speculators? Are you charging a reasonable fee?"
Bogle's third suggestion is to coordinate 401(k) plans with Social Security. Given that for most people the lifetime value of Social Security is somewhere between $300,000 and $400,000 -- guaranteed and inflation adjusted -- that, in effect, gives them that much in a fixed-income investment. Their 401(k) account could then be invested in stocks -- especially dividend-producing stocks -- that will provide a steady income.
"If you had $300,000 all in equities and $300,000 in Social Security, you're already at 50-50, you're almost there," Bogle says.
When Bogle says it, it sounds simple. Wish that it were so.