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: | , , |
|---|---|
| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
|
| 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 |
| id |
okr-10986-19709 |
|---|---|
| recordtype |
oai_dc |
| spelling |
okr-10986-197092021-04-23T14:03:44Z Administrative Costs and the Organization of Individual Retirement Account Systems : A Comparative Perspective James, Estelle Smalhout, James Vittas, Dimitri ACCOUNTS ADMINISTRATIVE COSTS ADMINISTRATIVE FEES ADVERTISING ASSET MANAGEMENT ASSETS AUDITORS BANK DEPOSITS BENCHMARK BID BIDDING COLLUSION COMMERCIAL BANKS CONSUMERS COST ALLOCATION COST EFFICIENCY COST SAVINGS DEREGULATION DOMESTIC MARKET ECONOMIES OF SCALE EMERGING MARKETS EXPENDITURES FINANCIAL INSTITUTIONS FINANCIAL MARKETS FINANCIAL PLANNERS FIXED COSTS INDIVIDUAL RETIREMENT ACCOUNTS MARGINAL COST MARKET FORCES MARKET SHARE MARKETING COSTS MARKETING STRATEGY MERGERS MUTUAL FUND MUTUALFUNDS NEW PRODUCT DEVELOPMENT OLIGOPOLY PORTFOLIO PRICE CEILINGS PRICE COMPETITION PRICE DISCRIMINATION PRODUCTION FUNCTION QUALITY OF SERVICE REBATES REGRESSION ANALYSIS REGULATORY CAPTURE RETAIL SALES SHAREHOLDERS SOCIAL MARKETING SPREAD STOCKS TIME SERIES TOTAL COSTS TRANSACTIONS COSTS TRUSTS TURNOVER UNEMPLOYMENT VARIABLE COSTS VOLATILITY WAGE DIFFERENTIALS WAGES 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. 2014-08-26T19:49:54Z 2014-08-26T19:49:54Z 2001-02 http://documents.worldbank.org/curated/en/2001/02/1003164/administrative-costs-organization-individual-retirement-account-systems-comparative-perspective http://hdl.handle.net/10986/19709 English en_US Policy Research Working Paper;No. 2554 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research Latin America Chile |
| repository_type |
Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
| building |
World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English en_US |
| topic |
ACCOUNTS ADMINISTRATIVE COSTS ADMINISTRATIVE FEES ADVERTISING ASSET MANAGEMENT ASSETS AUDITORS BANK DEPOSITS BENCHMARK BID BIDDING COLLUSION COMMERCIAL BANKS CONSUMERS COST ALLOCATION COST EFFICIENCY COST SAVINGS DEREGULATION DOMESTIC MARKET ECONOMIES OF SCALE EMERGING MARKETS EXPENDITURES FINANCIAL INSTITUTIONS FINANCIAL MARKETS FINANCIAL PLANNERS FIXED COSTS INDIVIDUAL RETIREMENT ACCOUNTS MARGINAL COST MARKET FORCES MARKET SHARE MARKETING COSTS MARKETING STRATEGY MERGERS MUTUAL FUND MUTUALFUNDS NEW PRODUCT DEVELOPMENT OLIGOPOLY PORTFOLIO PRICE CEILINGS PRICE COMPETITION PRICE DISCRIMINATION PRODUCTION FUNCTION QUALITY OF SERVICE REBATES REGRESSION ANALYSIS REGULATORY CAPTURE RETAIL SALES SHAREHOLDERS SOCIAL MARKETING SPREAD STOCKS TIME SERIES TOTAL COSTS TRANSACTIONS COSTS TRUSTS TURNOVER UNEMPLOYMENT VARIABLE COSTS VOLATILITY WAGE DIFFERENTIALS WAGES |
| spellingShingle |
ACCOUNTS ADMINISTRATIVE COSTS ADMINISTRATIVE FEES ADVERTISING ASSET MANAGEMENT ASSETS AUDITORS BANK DEPOSITS BENCHMARK BID BIDDING COLLUSION COMMERCIAL BANKS CONSUMERS COST ALLOCATION COST EFFICIENCY COST SAVINGS DEREGULATION DOMESTIC MARKET ECONOMIES OF SCALE EMERGING MARKETS EXPENDITURES FINANCIAL INSTITUTIONS FINANCIAL MARKETS FINANCIAL PLANNERS FIXED COSTS INDIVIDUAL RETIREMENT ACCOUNTS MARGINAL COST MARKET FORCES MARKET SHARE MARKETING COSTS MARKETING STRATEGY MERGERS MUTUAL FUND MUTUALFUNDS NEW PRODUCT DEVELOPMENT OLIGOPOLY PORTFOLIO PRICE CEILINGS PRICE COMPETITION PRICE DISCRIMINATION PRODUCTION FUNCTION QUALITY OF SERVICE REBATES REGRESSION ANALYSIS REGULATORY CAPTURE RETAIL SALES SHAREHOLDERS SOCIAL MARKETING SPREAD STOCKS TIME SERIES TOTAL COSTS TRANSACTIONS COSTS TRUSTS TURNOVER UNEMPLOYMENT VARIABLE COSTS VOLATILITY WAGE DIFFERENTIALS WAGES James, Estelle Smalhout, James Vittas, Dimitri Administrative Costs and the Organization of Individual Retirement Account Systems : A Comparative Perspective |
| geographic_facet |
Latin America Chile |
| relation |
Policy Research Working Paper;No. 2554 |
| description |
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. |
| format |
Publications & Research :: Policy Research Working Paper |
| author |
James, Estelle Smalhout, James Vittas, Dimitri |
| author_facet |
James, Estelle Smalhout, James Vittas, Dimitri |
| author_sort |
James, Estelle |
| title |
Administrative Costs and the Organization of Individual Retirement Account Systems : A Comparative Perspective |
| title_short |
Administrative Costs and the Organization of Individual Retirement Account Systems : A Comparative Perspective |
| title_full |
Administrative Costs and the Organization of Individual Retirement Account Systems : A Comparative Perspective |
| title_fullStr |
Administrative Costs and the Organization of Individual Retirement Account Systems : A Comparative Perspective |
| title_full_unstemmed |
Administrative Costs and the Organization of Individual Retirement Account Systems : A Comparative Perspective |
| title_sort |
administrative costs and the organization of individual retirement account systems : a comparative perspective |
| publisher |
World Bank, Washington, DC |
| publishDate |
2014 |
| url |
http://documents.worldbank.org/curated/en/2001/02/1003164/administrative-costs-organization-individual-retirement-account-systems-comparative-perspective http://hdl.handle.net/10986/19709 |
| _version_ |
1764440417994014720 |