Social Security Worse Than Even the Most Corrupt Private Funds

Kevin Drum and Matt Yglesias think that 401-K's are a total ripoff.

After the new fee disclosure statements went out, roughly the same percentage—half!—of participants said that they still do not know how much they pay in plan annual fees and expenses, according to a recent survey by LIMRA, an association of insurance and financial services organizations.

....For those 401(k) participants who said they thought they knew how much they paid in fees, most of them were way off base. One out of four participants thought they paid 25% or more in fees, 16% thought they paid between 10% to 24% in fees, and 30% thought they paid between 2% and 9% in fees. Only 28% of participants thought their fees were less than 2%.

That group is the closest to reality. On average fees and expenses range between 1 to 2 percent, depending on the size of the plan (how many employees are covered) and the employees’ allocation choices (index funds versus actively managed funds), says LIMRA.

First, this is bizarre, as the indictment here of private fund management seems to be that people are *gasp* paying fees that are much lower than they think they are.   Also, it may well be that these people are not mistaken, but just using a different mental definition for fee percentage.  After all, why is total assets necessarily the best denominator for this calculation?  Obviously the fund industry likes it that way because it gives the lowest number, but it could be that people are thinking about annual fees as a percentage of the annual income.  Thus a fee of 1-2% of assets could well be 25% of annual income.  Hell, since I invest for income growth, I could argue that this is a MORE rational way to think about fees.  Obviously Drum and Yglesias are just captive mouthpieces of big Mutual Fund.

Second, and perhaps more importantly -- do you know what retirement fund has higher implicit fees and a lower lifetime total return than nearly any private fund in existence?   Social Security.  Read your statement you get and do the math.  You will find that the total you will likely get out will be less than you put in, even BEFORE present value effects, even if you have put money in for 30 years.  In other words, the internal rate of return on your and your employer's taxes is less than zero.

Ahh, but you say, that is because your Social Security taxes are going to subsidize people who don't work.  Fine, but then don't be surprised if there is strong support for a retirement system that does not pass the money through government hands.  Even getting a crappy rate of return from some hack investment manager is likely still better than putting your money in a government system where cash is skimmed off to feed whatever political constituency has the clout to grab it.

Postscript -- by the way, I leave aside the issue of whether it is a productive thing to tax-subsidize.  I am generally against tax preference for selected behaviors, even relatively popular  ones like savings.  But Yglesias wants to replace 401-K's with some kind of coerced government system (the note about fees above is to make the case that the average person cannot be trusted and that our masters need to do the savings for us).  Image one giant Calpers.  Ugh.


  1. annonerz:

    "Image one giant Calpers." They are, and they like it. Did you see that reason piece where California or L.A. pensions were going to pull out of the LA Paper if it was bought by the Kochs? They were fine with it being bought by a prominent Dem politician/rent seeker, though.

  2. HenryBowman419:

    One wonders why the Calif. or LA pensions were even investing in such a losing enterprise...this does not sound like responsible fiduciary methods to me.

  3. Elam Bend:

    Didn't they recently pass a law that allowed, or automatically signed up (with an opt-out), private workers at firms over a certain size to CalPers?

  4. marque2:

    I too suspect folks are thinking about how much in fees is taken out of the "profits" rather than the total.

    Mutual funds do send report - I kinda glance at them and toss them myself. The direct fees - per mutual fund standards for mine in my Rollovers, where I get to choose the company and funds myself, is about 0.25% - I invest mostly in an Vanguard Index fund.

    the funds in my 401K - where the funds and management company are chosen by my employer, are about 1.25%

    Eh what can I do? Eventually I will leave for other employment and roll the funds over to Vanguard.

  5. SamWah:

    Of course they do--the gummint is perfect.

  6. mesaeconoguy:

    This entire piece is bizarre.

    Here’s how ignorant/moronic Kevin Dumb & Julio Yglesias are -

    “Last year the Labor Department issued new rules that forced
    funds to disclose their fees in an easily understood manner. The idea was that
    if they're going to rip you off, at least now you'll know how much they're ripping
    you off and maybe switch to a more honest fund. But it didn't do much good….”

    No shit Sherlock.

    These are the same people who brought you the “easy and quick” 61 page Obamascare application. Government-mandated financial disclosures hard to understand?

    Shocker! Whoda thunk?!

    Their answer: complete government control, with even more confusing and meaningless disclosures! And inferior performance, leading to even larger retirement underfunding and taxation!

    What's not to like?

    These crapbrains are setting the table for full government takeover of retirement accounts, and the retirement “system.” They are failing miserably, since this misguided, poorly written piece is entirely devoid of logic. [See also Frontline’s recent joke expose.] It also completely ignores the unbelievably shitty returns (about 2%) of “invested” SS
    funds, as Coyote correctly observes. Market returns are usually significantly higher, and as we know now, likely safer.

    Since Socialist Insecurity has worked out so well, along with other state-managed retirement systems and programs, total government control of retirement is sure to be a smashing success.


  7. Self Manage Super Fund:

    Golden Horse Wealth Management (GHWM) is a private equity firm that also runs its own hedge fund with a successful track record in derivatives, currencies and commodities.

    Self Manage Super Fund