Promises Broken

Greg Spears

VANGUARD GROUP is renowned for its rock-bottom investment costs, including announcing last week that it was lowering expenses on its target-date retirement funds. As a former Vanguard employee, I just learned how the company is, in part, paying for such cuts. Yesterday, Vanguard emailed retired “crew members” like me to say it was shutting down its retiree medical account program.

When my old newspaper company’s pension plan collapsed last year—it was underfunded by $1 billion—my payments were picked up by the federal Pension Benefit Guaranty Corp. I filed a few forms, waited a few weeks, and never missed a single cent.

But the money promised by Vanguard to its retirees comes with no guarantees, as I discovered yesterday. For each year after age 40 that you worked at the Malvern, Pennsylvania, fund manager, you got a $5,500 credit. There was 50% more added to a spousal account if you were married. After you retired, all that loot could be used to reimburse 75% of your health insurance premiums. To qualify, you had to work at Vanguard for at least 10 years and be age 50 or older, with your years of service and age adding up to at least 65.

Often, when a benefit is cut, the pain is phased in. Those hired after, say, 2021 might lose the chance to qualify. Not this time. Every qualifying retiree lost their account entirely. Their spouses, too, including widows and widowers.

Vanguard said it will make a one-time payment of $40,000 next year to assist with the change. That might sound generous. But if you worked there a long time, as I did, you lost a six-figure sum, at least on paper.

My old newspaper company’s pension plan was regulated by the Employee Retirement Income Security Act of 1974. That law guarantees workers’ benefits will be paid. Vanguard doesn’t offer a guaranteed pension, or at least not to rank-and-file employees. But its retiree medical account seemed solid. Until it wasn’t. In the end, it was just a promise.

I don’t want to say that Vanguard founder Jack Bogle would be spinning in his grave, because that’s such an overused cliché. I imagine, however, that he would have a few choice words to say if he were still here with us today.

I think Vanguard is a great place to invest, and I’m glad that I worked there. It felt good knowing we gave the average guy the best investments at the lowest cost. It was such a great business model that Vanguard was, on average, taking in $1 billion a day in new assets during the last two years I worked there. But being the lowest-cost provider is hard. You have to earn it every day. By cutting costs relentlessly.

Which reminds me of a story about life at ever-thrifty Vanguard. I got a call at my desk one day from a man who ran one of the country’s biggest 401(k) plans. The plan was replacing the provider of some of its index funds, he said, and bringing $7 billion to Vanguard.

Slightly shocked, I emailed the good news to my boss. I suggested we celebrate by having lunch at a nice restaurant.

He replied with two words: “You paying?”

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