Yet, this is a general problem of all kinds of investment funds, not only of index ones.
It is a huge problem (and probably responsible for much of the lawlessness we can find on Wall Street), but the switch from active to passive investment shouldn't change a thing.
It's not necessarily active vs passive. It's skin in the game vs no skin. Low fee index funds offer no incentive for the managers to do any actual managing. They follow an equation, and collect a few bps.
Yes, it's not even that simple. It's about having enough skin on the game.
No big fund manager has enough skin on the game. That has been true for most of last century and all of the current one, and the expected results are visibly there.
This is why my push isn't to necessarily increase the active management profession, but instead increase the intelligence of individuals and freedom of necessary information for them to properly manage and understand their own assets. Even if they do just end up choosing to invest in a market cap weighted broad based index, it's important for them to understand how to behave with the management of those assets and to have the ability to manage them (see the distinction versus investing in index funds, because Vanguard's investors do not manage their assets). And if they do not have the requisite intelligence to manage and understand the things they own, maybe they shouldn't own them.
It is a huge problem (and probably responsible for much of the lawlessness we can find on Wall Street), but the switch from active to passive investment shouldn't change a thing.