Q: Which is more important for investors: Low fees or indexing?
A: The most important thing for investors is cost. Indexing is the purest expression of that. Low-cost actively managed funds can make sense; we offer a number of low-cost active funds.
The real issue in the market place is high-cost funds. All the data suggest that this is so counter intuitive to all consumer purchases. For most consumer goods, the sense is that the more I pay the more I get something in addition. In investments, the data do not suggest that. The best predictor of future performance is cost. Funds in the lowest quartile of cost have outperformed consistently over every time period. So we start with cost, and indexing the purest expression of that.
Q: Aside from high fees, what do you think is the biggest problems investors face in saving for retirement?
A: Two huge challenges are out there. One is access to retirement plans. Many small companies don't offer them because of the complexity of doing so. But given that a large part of growth in employment been in smaller companies, that, to me is, the No. 1 issue: Half of all employees don't have access to a retirement plan. They are forced to save through IRAs or the president's new proposed account. Those are fine, but they are not going to get it done. I think we actually need to do some things to simplify employer-sponsored plans so that it's easy and affordable to get those plans.
The other challenge is savings rates. For those employees who do have access to employer plans, the average savings is 9%. If you combine company contribution plus what employees are setting aside, the number needs to be in 12% to 15% rang! e, assuming you start young and work to 65.
You might say that seems high, but there are some really important things to remember. One is that expected returns for the next 10 years – this is purely Vanguard's opinion – are the low side vs. historical norms. We know roughly what bonds will return, and on the equity side, based on valuations, we come out lower than normal – the 6-9% range, a bit lower than normal. A balanced portfolio will give a little less return than the last 30 years.
The second factor is that people living longer. If you're 65 today, you have a 50% probability live to 90. Many people are going to spend almost as much time in retirement as they did working. And without a hefty amount saved, that gets tough. I presume Social Security will get fixed – it will not take a lot to take system to get reasonably strong for the next 50 years. It won't be politically fun, but can get done. The other option is to assume you're going to work a little longer. No one wants to address that head-on, but when Social Security was created, it was based on retirement age of 65, which was the expected lifespan. People expected to work until they died. The whole idea of retirement is something new in the last 50 years.
Q: Do you see much of Jack Bogle these days?
A: I see him periodically. He still keeps an office on the campus. I see him most frequently in the galley at lunchtime. But he's out doing a lot of writing and speeches. I see (former Vanguard CEO) Jack Brennan fairly frequently. He keeps an office here, he's very busy, doing a lot of work on non-profits corporate boards. He's still available for advice. We share a couple of similar passions: We're both very active in United Way, and we're both very interested in education. I taught first-year Latin – the Jesuits got me started in Rochester, N.Y., and I kept up with it and took ancient Greek in college. I'm a huge believer in the liberal arts. It's great preparation for the real world and gives you a broade! r perspec! tive on live. I went to business school at Wharton, but often find myself looking back at my undergrad and high-school background.
Q: Does Vanguard have any plans for fundamental indexes – i.e., equal-weighted, dividend-weighted, funds?
A: The short answer is no. We don't consider that indexing -- we consider it active management. For many traditional active managers, the big source of their returns are coming from those strategies. Fundamental indexing does it more on an automated basis. There's nothing wrong with the concept, if it's expressed as an active bet, but it's incorrect to say it's a substitute for indexing. It's expressing a bet against the market in one way, shape, or another.
I think that there's way too much product proliferation today, people equate proliferation with innovation, and that's not correct. They're taking the concept of indexing, slicing it thinner and thinner, and that's not good for investors. The real frontiers are around helping people put together building blocks to create diversified portfolio.
Q: Vanguard has been actively courting the adviser business. What percentage of your business is driven by advisers these days, and are there any drawbacks to that?
Probably 30% of our business is adviser-based, which makes us a big player in that market. All we're trying to do is take the low-cost message and say, it matters to your clients, too. We don't see a lot of drawbacks to that. We're not in the payment-for-distribution model, we're only in the fee-based model, and that base is growing rapidly. We love dealing with clients directly, we love dealing with clients through 401(k)s, and we love dealing with clients through advisers, where the goals and needs align.
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