California’s Smart Retirement Plan and the Industry That Resists It
Today, half of the American families have precisely zero retirement savings, not counting conventional pension plans, which are becoming ever less common, or Social Security. There are two fundamental causes of this distressing scenario. The first is that many households don’t make enough to cover their basic living expenses. The second is that even those who ought to put cash apart regularly don’t have easy access to retirement savings programs—which is especially the case for workers whose employers don’t offer any form of retirement plan.
To tackle this second difficulty, numerous states are experimenting with public packages that involuntarily register personnel in a retirement plan if their employers don’t offer one. California’s plan (which nevertheless ought to be finalized after various different variations passed the two houses of the state legislature the past week) would automatically cover every person who works at an organization with five or more employees. By default, each entrant could save 3 percent of her income, however, people might have the choice to alter their contribution percentage or to quit altogether.
One might assume that the asset-management industry could be ecstatic at the prospect of millions of new clients investing tens of billions of dollars. But mutual-fund agencies are glad to introduce clients if it’s on their own terms.
The Investment Company Institute, a lobbying organization for the asset-management enterprise, is complaining that California’s plan might cap administrative costs—this is, the quantity paid to asset managers for taking care of individuals’ cash—at 1 percent of the total funds invested. The ICI warns that the plan can be drastically costly to control, and the state could be on the hook for the difference.
This is an act of misdirection. For large described-contribution plans, administrative fees—basically record-keeping and customer-service expenses, instead of the better-recognized fund-management fees—are regularly on the order of 10 basis factors, or one-tenth of one percent. That’s what I pay for my University of Connecticut retirement plan and what my wife pays for one of her University of Massachusetts plans.
But, the industry says, a retirement plan for small commercial enterprise employees can have lots of little accounts without a lot of cash in them, so administrative expenses will be higher than ordinary. There’s a simple way to debunk this claim. Vanguard is a mutual-fund organization that is owned by its investors, so it’s similar to a nonprofit. And anyone with simply $1,000 can open an online-only Individual Retirement Account at Vanguard with exactly zero administrative charges. Vanguard covers its expenses with its individual funds, which charge management fees which are the lowest in the industry (around 15 basis points, or 0.15 percent, for a target-date fund with a $1,000 minimal investment).
In fact, Vanguard already offers small-business retirement plans with no administrative prices. My family employs a part-time housekeeper and a few part-time babysitters. We pay payroll taxes, unemployment insurance contributions, and workers’ compensation insurance premiums. Because we know the importance of saving for retirement, we also make contributions to a retirement plan at Vanguard, which has no costs, regardless of how small the individual person’s account.
There are a lot of mutual-fund organizations with the size and computer systems to run California’s new retirement plan at a fee of less than 1 percent of the assets under management. So what’s happening here? Here’s a concept: The Investment Company Institute is likewise disappointed about a Department of Labor rule that allows states to limit rollovers out of their plans into private sector Individual Retirement Accounts. “We hoped employees would have the right to move out at any time they desired,” one of the ICI’s lawyer informed The San Francisco Chronicle. That makes it sound like the rule limits workers’ freedom of preference, however, in exercise it approaches that asset managers may not be able to vacuum up peoples’ retirement savings accounts as workers transfer from one job to some other.
What the asset-management industry is without a doubt afraid of is the consolidated buying power of large, public retirement packages. They are afraid that those new state plans will, by virtue of their size, be capable of negotiating low prices from fund companies. And they may be in particular afraid that many employees will depart their cash in those plans for the long term instead of venturing out into the private market, wherein they can be tempted into high-priced, actively-controlled mutual funds that generate higher earnings for fund organizations.