No bonanza for funds seen in Social Security reform

Reuters ^ | Nov 8, 2004 | Herbert Lash

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In NEW YORK story of Nov. 5 headlined, "No bonanza for funds seen in Social Security reform," please read "... Pozen ..." instead of "... Pozens ..." throughout. (Correcting name)

A corrected repetition follows:

By Herbert Lash

NEW YORK, Nov 5 (Reuters) - The bonanza many believe President Bush has handed the mutual fund industry with his plans to reform Social Security may be a mirage, industry leaders said on Friday.

How workers will be allowed to invest some of their payroll taxes in the stock market is far from clear, but there is a presumption it will be windfall for an industry that manages the nest eggs of about 95 million Americans.

The administrative costs for managing accounts that for the most part will hold less than $1,000 in the first year suggests mutual fund companies could easily lose money for at least several years, industry experts said.

"It is not clear that if you have private accounts that this will be a bonanza to the mutual fund industry," said Robert Pozen, chairman of MFS Investment Management in Boston. "If certain design decisions are made, it might turn out to be a very difficult place to make a profit."

Pozen also said he believed Congress might try to guarantee returns for investors, which would slap an obligation on the government the accounts are trying to ease.

Because of the small size of most accounts, it will probably take five years to get the system off the ground and be a size that is reasonable for the private sector, he said.

The Investment Company Institute, the main lobby for the mutual fund industry, has said the transition to personal retirement accounts will require government-sponsored funds.

Mario Gabelli, chairman of Gabelli Asset Management Inc., said mutual funds would be the logical depositary of any decision to create personal retirement accounts for workers.

But he said the costs associated with keeping track of the Social Security accounts will be burdensome for many money managers. "You can't make money on it," he said.

The ICI is also concerned that the public will need to be educated on investing if the retirement accounts are to fly.

"We don't think you can be successful without some sort of investor education. Otherwise young investors might put their money in inappropriate investments," said ICI spokesman John Collins.

Pozen, who formed part of a commission that Bush appointed in 2001 to examine Social Security, said constraints on fund size, investment choices that investors will be allowed and other costs spell potential problems for the fund industry.

How the accounts are designed, whether workers can invest on a monthly, quarterly or yearly basis, and whether they can split their investment, are important cost considerations. Computers can keep down certain bookkeeping costs, but small accounts are more expensive than larger ones, he said.

"Account size drives a lot of costs, and transaction costs too," he said. "If you have $100 coming in every month into two funds, it's really hard to make money until that account gets to $10,000" or more.

Bush's commission estimated annual administrative costs on personal retirement accounts might be just 0.3 percent, or $3 for an account holding $1,000. While that might be good for the investor, it's a losing proposition for fund companies once the cost of providing account statements and basic Internal Revenue Service information is considered, Pozen said.

"God help if the guy actually calls and asks a question," he said.