NCPA - National Center for Policy Analysis

Fees Aren't A Problem For Private Retirement Accounts

March 19, 1999

Some Social Security reform proposals would let workers set aside a percentage of their payroll taxes in personal retirement accounts. Concerns have been expressed that the administrative and fund management costs of such accounts would be high, leading to suggestions that the U.S. Treasury Department and Social Security Administration (SSA) should collect contributions and maintain records, with only the investment of the funds privatized.

However, economists say such concerns are easily answered.

  • In the first few years of any retirement account, a fixed dollar fee for administrative and management costs, say $50 a year, might absorb a substantial portion of the earnings because accumulated contributions and investment income are small.
  • A flat fee makes economic sense because it costs as much to process a $10 deposit as a $1,000 deposit.
  • Instead of flat fees, however, many financial institutions use a sliding fee schedule that shifts some of the administrative costs from small accounts to large ones.
  • And mutual funds go further, charging a flat percent of assets with no cap, enabling them to keep the rate at a few tenths of a percent; thus they undercharge small account holders at the beginning to build a long-lasting business relationship and recoup the costs later on.

Under any of these methods, over the life of the account, the charges might be 25 to 50 basis points, or 0.25 percent to 0.5 percent of assets. This would still leave savers with much higher rates of return than they can get from Social Security.

And although the SSA currently has low administrative costs, if it had to manage individual accounts, keep track of each person's contributions and investment selections, track account balances and issue statements, its costs would approximate the private sector.

Source: Stephen J. Entin, "Administrative Fees No Barrier to Personal Retirement Accounts," IRET Congressional Advisory No. 77, March 10, 1999, Institute for Research on the Economics of Taxation, 1300 19th Street, N.W., Suite 240, Washington, D.C. 20036, (202) 463-1400.


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