Investment industry wary of expanding the market for its services

[mahatmakanejeeves]

Investment industry wary of expanding the market for its services

by Steven Pearlstein
{in print, Sunday, July 20, 2014, page G1}

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With a good head for numbers, {Daniel Biss, a Democratic state senator from Illinois} has been in the thick of crafting a financial rescue for Illinois’s criminally underfunded and overgenerous pension system. And more recently, he shepherded through the Senate (without a vote to spare) a law requiring all but the smallest employers in Illinois to automatically enroll employees in an Individual Retirement Account if they do not offer a pension or some other retirement savings plan. Employees can opt out of the program, or reduce the standard contribution of 3 percent of wages and salaries, but experience shows that few actually do.

This concept goes by the name of “Automatic IRA.” It was first proposed in 2006 by two respected policy wonks, David John, then of the conservative Heritage Foundation (now at AARP), and Mark Iwry, then at the more liberal Brookings Institution (now at the Obama Treasury). It quickly won support from Democrats and Republican sponsors on Capitol Hill. In the 2008 presidential campaign, both John McCain and Barack Obama endorsed it.
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In fact, the industry that would administer all those tens of millions of new accounts and manage the hundreds of billions of dollars in extra savings is leading the fight against it in Illinois and more than a dozen other states. And therein lies a case study of how dysfunctional our political process has become. ... Having poked around a bit, what I’ve discovered is that the industry’s real concern is that there will be little or no profit to be made by setting up and managing millions of new small-dollar accounts. Their fee structures are based on expectations that higher-income workers and employers will make significant and consistent annual contributions to larger and more complex 401(k) accounts. And while there is nothing in the proposals that will require any company to serve this new market if they don’t want to, they are afraid of opening the door to new low-cost, high-volume competitors that might develop relationships with people who later graduate to more profitable products.
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And for the industry, that’s the rub. Industry executives fear that allowing the government to set up the “public option” will be the first step on a slippery slope toward greater regulation of the products they can offer, as has happened in the insurance exchanges under Obamacare. Just as significantly, they fear that government-managed programs will set in motion a competitive dynamic that will expose — and ultimately drive down — the significant profits they now make from retirement products.
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