Vanguard’s mobile At-Cost Café will sell hot and cold cups of coffee for $0.26, one-fifth the average price. The café is designed to raise awareness among investors about the impact of costs and help them understand how minimizing costs in their investment portfolios can potentially enable them to save more.
The café starts its seven-week U.S. tour today in San Diego, with scheduled stops in San Francisco, Chicago, Washington D.C., New York and Boston. It will spend three days in each city in prominent, well-traveled locations. The full schedule and locations appear on the At-Cost Café website.
In addition to the café, Vanguard plans to increase its cost education efforts through its multiple online and social media channels during the next two months. The company plans to elevate new content to its website (vanguard.com), focusing on how saving a little can go a long way, how costs can affect overall portfolio returns, and how investors are increasingly recognizing the power of broadly diversified, low-cost portfolios.
Vanguard also recently published its Principles for Investing Success, which outlines four key fundamental tenets: 1) Create clear and appropriate goals; 2) Develop a suitable asset allocation using broadly diversified funds; 3) Minimize cost; and 4) Maintain perspective and long-term discipline. Cost is significant because every dollar paid in management fees or trading commissions is simply a dollar less that potentially could be earning return, Vanguard said.
“Planning for a financially secure retirement is a huge challenge that many individuals face in this country,” said Paul Heller, managing director and head of Vanguard’s Retail Investor Group. “Low costs are a critical factor in determining retirement readiness, and Vanguard believes that educating investors about cost will give them a better chance of investment success.”
Vanguard research affirms that individual investors, financial advisers, and defined contribution plan sponsors are beginning to understand the key role cost plays in a portfolio. In the report “Costs Matter: Are Fund Investors Voting with Their Feet?,” researchers found that in the last 10 years, investors continue to commit the largest amount in assets to low-cost products, largely due to the popularity of low-cost index funds and ETFs. The researchers also found that the asset-weighted expense ratio for U.S. equity funds dropped by 31% from 2003 to 2013, to 0.64%. For U.S. taxable bond funds, the asset-weighted expense ratio dropped by 28%, to 0.47%.
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The
financial services industry has to do a better job of
helping people meet retirement goals, said Laurence Fink, chairman and chief
executive of BlackRock.
Today’s
world and tomorrow’s goals call for outcome-oriented solutions, Fink said in a
talk last week at New York University’s Stern School of Business.
During
Fink’s formative years, the U.S. was launching the Great Society, which sought
to summon the resources of government to wipe out poverty. “Today, the
generation that came of age with the Great Society is headed for retirement and
giving you a Gray Society,” Fink said, “where we will need to summon up even
greater resources just to meet their needs.”
Citing
longevity statistics that predict one in four Americans who is 65 today will
live past 90, and that nearly one-third of babies born two years ago will live
to 100, Fink called the Gray Society an expensive blessing, with rising
Medicare costs and underfunded government and corporate pensions.
“And
individuals aren’t ready,” Fink said, pointing to statistics from the Employee
Benefits Research Institute, which found only two thirds of workers have saved
anything for retirement, and most workers have saved less than $25,000.
The
three legs of the traditional retirement stool—Social Security, pensions and
personal savings—have been allowed to grow rickety, Fink said. “Retirees now
depend on Social Security for 70% of their income.” But while Social Security
is an essential part of the retirement system, he said, the program was
established for different demographics and was never intended to be an
individual’s sole retirement income.
The country needs to acknowledge the existence of a systemic crisis that is
threatening no only retirement systems but also economic futures, Fink said. “And
because of its far-reaching effects, a solution needs to be as big and urgent a
national priority as anything we have faced in recent years. The longer we wait
to act, the bigger the problem will become.”
Admitting to a
Crisis
How
to finance longer lives is a crisis that needs facing up to, and the country
needs to take action on several fronts. “Employers need to step up in every way
that can help workers achieve a secure retirement,” Fink advised. “Shifting
from defined benefit plans to defined contribution plans does not absolve
employers from the moral obligation to help employees prepare for retirement.
More employers need to offer plans, auto-enroll all employees, provide matching
funds and educate employees on the absolute necessity of maxing out their
plans. The bottom line is, employers need to do more to fund their workers’
retirement.”
Fink
called on the asset management industry—including his own company, BlackRock—to
do a better job. The industry needs to measure its performance not against
benchmarks but against investors’ objectives or liabilities, focusing far less on
short-term sales and products, and much more on investors’ long-term needs. “Investors
don’t care if a fund holds mid-cap stocks or Mexican government debt,” Fink
pointed out. They want products that will provide long-term outcomes to help
buy a house, pay college tuition or fund retirement.
Absolute
certainty is never an option with any investment that carries a measure of risk,
Fink said, but emphasized that financial services firms must do “a much better
job of accompanying savers on their life journeys with outcome-oriented
solutions that help them understand how to stay on course— with target-date
funds, target risk funds and multi-asset solutions made for today’s world and
tomorrow’s goals.”
The
financial services industry must help investors look beyond the headlines, “recognizing
that successful investing is not about timing the market, but about time in the
market.” Investor education was the motivation for BlackRock’s education campaign
to get investors focused on broader opportunities in the market and the need
for a long-term, patient approach.
An Australian
Model
Pointing
to Australia’s successful superannuation system or the new pension requirements
in the UK, Fink said that given the massive amounts of savings needed, as well
as investor psychology and the reality of risk aversion, the country needs a substantial
solution to retirement savings that includes some form of mandatory retirement
savings.
In
Australia, for every part-time and full-time employee age 18 to 70, employers
must contribute a portion of income into a superannuation account, which then
belongs to the employee. It was launched 20 years ago, when the country looked
ahead to the crisis it would face in paying for retirements. At the start, the
contribution was just 3% of income. It has gradually risen to 9% of income
today and will rise to 12% by 2020. And individuals can make additional
contributions on top of that.
Fink
lauded superannuation in Australia and called it a huge success in
supplementing the government pension scheme and taking the strain off it, “an
attractive prospect as we think about how to relieve the burden on Social
Security in this country. All told, in just 20 years, more than $1.6 trillion
in assets are held in these accounts, giving Australians one of the highest per
capita retirement savings pools in the world.”
Thrift for All?
He
approved of some effective models in the U.S., such as the pooled fund for
small employers managed by CalPERS, the state employees’ pension fund in
California. “Perhaps we could do something similar nationally by opening the
highly successful Thrift Savings Program for federal employees to all workers,”
Fink said. “That’s the model being adopted nationally in the U.K. with the
creation of the NEST plan. Or we could model a solution on successful pools
already created for small employers and nonprofits.” He emphasized that the
current system is broken, and an approach that includes some form of mandatory
savings in addition to Social Security is needed.
Pointing
to research that found individuals in the U.S. contribute 6.2% of their wages,
up to $113,000, to the retirement system, and employers contribute another
6.2%, “we have a total contribution of over 12% of wages,” Fink said. If invested
in the right way over 30 or 40 years, that would generate a comfortable
retirement nest egg. “But many Americans are worried about the future of Social
Security and that their 401(k)s and individual retirement accounts (IRAs) aren’t
sufficient to meet their needs,” he said. “The current system simply isn’t
working and the longer we wait to fix it, the tougher the task becomes.”
A
mandatory retirement savings system would need to be phased in gradually in
order not to create a shock to the economy. But Fink said it could relieve
pressure on the federal budget, and the markets would welcome that outcome. “But
most importantly, it would relieve the crisis of financing longevity that will
be a drag on our economy and job creation for years to come if we don’t deal
with it soon.”