Let’s suppose Bushe privitise goes through.
The returns climb well through 2007.
The bottom falls out in 2008.
Everyone invested in the stock market loses their socks.
Do the people managing these portfolios still get to keep their their incomes from the ones that crashed?
Most likely yes. But all this is moot at the moment since there is no set plan to do anything with social security yet. As I heard it in the speech, all options are on the table. In any case this is not a general question that can be answered factually.
Even if the plan goes through, only about $1000 per year will be allowed to be set aside into private accounts. Losing that won’t break anybody by 2008.
2058 is another matter, however, which is a point that critics have been using against the plan. Since we haven’t seen the plan, there’s no way yet to tell how this will be addressed in it.
I honestly don’t understand the question in your last line, however. Could you restate it?
The great thing about being a portfolio manager is that stocks go up, you get paid. Stocks go down, you get paid. You could lose your job if you don’t beat expectations, though. But managing a portfolio that goes down because the market goes down doesn’t mean they lose their income.
Generally, mutual fund companies collect a fee every year based on the total size of the fund. About 1% is common. If you have $1,000 invested, they take $10. If the fund rises to $1,200 in the next year, they’ll take $12. If in the third year, it drops to $800, they’ll only get $8. Once the fee is collected in a year, it will not be returned in later years.
There are exceptions to this fee structure. In many hedge funds, the management takes a cut of profits instead of assets.
Actually in most hedge funds the management takes a cut of the profits and the profits. A typical hedge fund charges 1% to 1.5% of assets and 15% to 20% of all profits above the high-water mark. The high-water mark is basically the highest value to funds assets have ever risen to (corrected for fees).
If the stocks go to zero, then the two possible results are these:
With manager fees of 1%, it will be deducted when paid. Your $1 will first become 99 cents, then zero.
With no manager fees, your $1 will be $1 until the stock crashes, then it will become zero.
Why even bother with a mutual fund? I’d set it up so that you could stick that $1000 a year into an index fund. Bingo! No management required and if something happens to completely destroy the value of an index fund we’ve got other problems than Social Security.
Wishful thinking.
So the fund managers still make their money even if the stock market tanks?
OldGuy - You’re right. Sorry about that. The hedge funds do often take from profits and assets.
Yes. The funds still have fees. As the market tanks, the fees will shrink because the pot of assets shrinks. Some fund management fees get hit twice in a down market. The asset value shrinks and people pull money out of the fund. There are less assets and those that exist are worth less.
If your SS money is put into these funds you won’t be able to pull them out.
So now we know who’s behind the privitization push…
There isn’t much of a firm proposal yet. You may be able to remove the money from one fund to another. What if there are five option? If one falls, people may be tempted to move it to the fund that did best last year. People may chase higher returns and get screwed. I have no idea what the final proposal will be.
Your original fee question is addressed somewhat in today’s Wall Street Journal (page C1). The article discusses what financial services companies might be interested in this an how it could be run. They mention State Street, Vanguard and Barclays as the probable contenders because of their experience running large funds for low fees.
The administration’s analysts often compare what they want to do with the federal Thrift Savings Plan (TSP). Its a bit like a 401(k) and its run by Barclays. The fees on that plan are about .06%. If you invested the $1,000 cap, the fee would be about 60 cents. Since the government administers the accounting for all the individual accounts of the employees, Barclays treats the fund as one massive account from the government. This may be what comes of the Social Security system.
The article goes on to mention that the ability to take your funds elsewhere after reaching some threshold may not be that valuable. The existing fund companies may not be that eager to compete for a bunch of $10,000 accounts. They may figure servicing the account does not have much upside in the relationship.
I guess the thrust of the article is that the existing outline of a proposal does not look very lucrative for the fund management industry.