Administrative Costs and the Organization of Individual Retirement Account Systems : A Comparative Perspective
What is the most cost-effective way to organize individual accounts that are part of a mandatory social security system? Defined-contribution individual account components of social security systems are criticized for being too expensive. The autho...
| Main Authors: | , , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2001/02/1003164/administrative-costs-organization-individual-retirement-account-systems-comparative-perspective http://hdl.handle.net/10986/19709 |
| Summary: | What is the most cost-effective way to
organize individual accounts that are part of a mandatory
social security system? Defined-contribution individual
account components of social security systems are criticized
for being too expensive. The authors investigate the
cost-effectiveness of two methods for constructing mandatory
individual accounts: a) Investing through the retail market
with relatively open choice among investment companies (the
method first used by Chile and adopted by most Latin
American countries). b) Investing through the institutional
market with constrained choice. For the retail market, they
use data from mandatory pension funds in Chile and other
Latin American countries and from voluntary mutual funds in
the United States. For the institutional market, they use
data from systems in Bolivia and Sweden and from larger
pension plans and the federal Thrift Saving Plan in the
United States. The institutional approaches aggregate
numerous small accounts into large blocks of money and
negotiate fees on a centralized basis, often through
competitive bidding. They retain workers' choice o some
funds. Fees and costs are kept low by reducing incentives
for marketing, avoiding excess capacity at system start-up,
and constraining choice to investment portfolio that are
inexpensive to manage. In developed financial markets, the
biggest potential cost saving stems from constrained
portfolio choice, especially from a concentration on passive
investment. The biggest cost saving for a given portfolio
and for countries with weak financial markets comes from
reduced marketing activities. In the retail market, where
annualized fees and costs range from 0.8 percent to 1.5
percent of assets, use of the institutional market in
individual retirement account systems has reduced those fees
and costs to less than 0.2 percent to 0.6 percent of assets.
This reduction can increase pensions by 10 - 20 percent
relative to the retail market. Countries that can surmount
rebidding problems, weaker performance incentives,
inflexibility in the face of unforeseen contingencies, and
an increased probability of corruption, collusion, and
regulatory capture should seriously consider the
institutional approach, especially at the start-up of a new
multipillar system or for systems with small asset bases. |
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