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Saturday, May 23, 2015

Bloomberg: Even Financial Pros Choose Indexing for Retirement Savings

Even Financial Pros Choose Indexing for Retirement Savings

John C. Bogle, founder of the Vanguard Group Inc., speaks at a portfolio manager conference in New York, U.S., on Thursday, Feb. 16, 2012. Bogle, who popularized index investing, said lower tax rates for certain types of gains earned by private equity firms are "ridiculous." Photographer: Scott Eells/Bloomberg *** Local Caption *** John C. Bogle

Planning for retirement? You're better off saving on fees in an index fund than trying to beat the markets.

That recommendation by legendary investor Jack Bogle is shared by 42 percent of financial professionals in the latest Bloomberg Markets Global Poll, who were asked about the most appropriate way for a midcareer person to invest for retirement. Only 18 percent said actively managed mutual funds were the best option, 17 percent recommended individual stocks and bonds, and 14 percent favored real estate.

The results suggest that many pros—people who are paid to make money for investors—are throwing in the towel and siding with Bogle, the founder of Vanguard Group who built the firm on the idea that most professionals can't beat the market and that investors therefore would be better off in low-cost index funds. Over the past five years just 21 percent of active funds that buy U.S. stocks beat their benchmarks, according to data from Chicago-based Morningstar Inc.


"We've been through a period where the indexes have outperformed," said Burton Greenwald, a mutual fund consultant based in Philadelphia. "It remains to be seen if that is a permanent shift or something that will go away."

The support for index funds and exchange-traded funds was most pronounced in the U.S., where 52 percent of respondents favored them. That compares with 36 percent in Europe and Asia. The poll surveyed 1,280 traders, analysts, money managers and executives who are Bloomberg subscribers.

Over the past five years, investors have poured more than $1 trillion into equity products, both mutual funds and ETFs, that track indexes, according to data from Morningstar. Funds run by stock pickers experienced $266 billion in redemptions in the same period.

The change in attitude has put the stock pickers on the defensive. Los Angeles-based Capital Group, which manages more active stock money than any other mutual fund company, has put out two studies touting the benefits of stock picking. Boston-based Fidelity Investments, which ranks second, has been running a series of ads, highlighting the fact that its top managers have beaten their benchmarks over long periods of time.

Mutual fund managers may take comfort in the fact that they're still viewed as vastly better for retirement savers than their high-paid colleagues at hedge funds. Only 3 percent of poll participants said that hedge funds are the best choice.


Hedge funds, which carry higher fees than actively managed mutual funds, have also struggled since the financial crisis. In the five years ended March 31, the Bloomberg Global Aggregate Hedge Fund Index returned 3.2 percent a year. That compares with 14 percent for the Standard & Poor's 500 Index and 11 percent for a Vanguard index fund that owns a mix of 60 percent stocks and 40 percent bonds.

Poll respondents weren't optimistic that hedge funds will outperform markets in the future. One-quarter of those polled said hedge funds may outperform in declining markets, 17 percent said hedge funds have seen their best days and 9 percent said hedge funds will get their mojo back. The biggest group, 40 percent, said investors should buy hedge funds if they want results that are uncorrelated to the stock market.

The Bloomberg Markets Global Poll gathered responses from 1,280 Bloomberg terminal subscribers. It was conducted April 14 and 15 by Selzer & Co. of Des Moines, Iowa. The margin of error is plus or minus 2.7 percentage points. 

Bloomberg: Your 401(k) Plan May Be Selling You Short

Your 401(k) Plan May Be Selling You Short

If you were auto-enrolled at a default rate of 3% of your salary, don't assume it was for a good reason

Is 3 percent some magical retirement savings number?

When companies with 401(k) retirement savings plans enroll new hires automatically, many set a default contribution rate of 3 percent of salary. Why not 4, or 5.5, or 6? Are companies saying you can afford to retire if you save just 3 percent of your salary a year?

Hardly. Less than 22 percent of large companies surveyed by Towers Watson even provided 401(k) participants with a suggestion about how much to save. Of the companies that did, 39 percent recommended 10 percent or more. Increasingly, retirement experts say 15 percent is more like it. 

While few plans dare set default rates that high, more are moving to 4, 5, or 6 percent. A few use 8 percent, including General Electric, which is tied at No. 13 on Bloomberg's interactive 401(k) ranking, and at least one company, Google, sets it at 10 percent. 


If your plan enrolled you at 3 percent, there is a reason. It's just not a very good reason. Three percent may be the norm simply because it was used in an example the government gave to employers early on, said Rob Austin, Aon Hewitt's director of retirement research. The other reason it's common, he said: Plans mimic their peers.

Since most plans match employee contributions of up to 6 percent at 50 percent, anyone who's kept their contribution at 3 percent purely out of inertia should bump it up to at least meet the company match. That may sound painful, but studies of plans that upped their default contribution rates from 3 percent to 6 percent found that people didn't abandon the plan. If you're lucky enough to be looking forward to a raise, time the increase in your contributions to coincide with that, so the cash flow hit isn't as painful or obvious.

If your plan has an auto-escalation policy, it will raise your salary deferral rate into the plan automatically every year, usually by 1 percent. Plans tend to stop those 1 percent increases when workers hit 6 percent. But as with the default rate of 3 percent, some companies have realized they may be sending the wrong message in suggesting that 6 percent of salary is enough to save for retirement. More companies are letting the cap rise to 10 percent or even 15 percent. It costs companies nothing, since after 6 percent employees have usually met the company match.

Some companies that work with Towers Watson are rethinking the psychology of the numbers they use in their plan, said Robyn Credico, defined contribution practice leader for North America at Towers Watson. When rejiggering plan designs, some are considering matching to a bigger number but spreading the match out over more years. That way people would presumably save more, since a lot of employees tend to save up to the match. For a company, offering 33 percent on a 9 percent match would cost the same as a match that pays 50 percent up to 6 percent. 

Those kinds of changes aren't happening quickly. No one wants to be first.

"Everyone is following each other, but they all are saying people aren't ready for retirement," said Credico. "The question is who will be the first to step outside the norm and change behavior." 

Correction: An earlier version of this article cited Boeing, rather than General Electric, as an example of a company whose plan has auto-enrollment at 8 percent.