Everyone’s an Expert
Many find the argument that workers will end up better off if they are able to invest their own retirement savings compelling, running parallel as it does to all sorts of American beliefs in free markets and individual initiative. Those hoping to test this theory have occasionally looked to Social Security privatization’s private-sector counterpart, the self-directed investor movement, for insight. This phenomena manifested itself in corporate America’s migration from defined benefit to defined contribution retirement plans such as 401(k)s.
Unfortunately, this private-sector example is not entirely revealing. Most employer-sponsored, self-directed retirement plans of the 401(k) stripe offer the worst-performing, least-transparent and fee-heavy investments the mutual fund industry can concoct. On a net-of-fees basis, individual workers are lucky if these funds can huff and puff fast enough to beat inflation; most hang limply a point or two below their benchmarks.
The performance of plans, such as IRAs, that provide more investment choices is more telling, but not encouraging. These have, in most cases, given individuals enough rope to impoverish themselves. Economists such as Terry Burnham, along with those who call themselves behavioral economists, argue that human beings are not predisposed to making rational investment choices. (See “The Edge of Reason,” page 54.) The emotional, herd-following, inappropriate or ill-considered investment choices made by millions of workers, which wiped out trillions of dollars of value in their IRAs when the dot-com bubble burst, buttress their arguments.
The administration, bowing to the public’s newfound (and very rational) fear of its own investing incompetence, seems to have abandoned the courage of its free-market convictions and now proposes a Social Security scheme more along the lines of the 401(k) example. But, by seeking to save the reckless from themselves, it will force competent investors to underperform by sharply limiting their investment choices to a handful of plain vanilla funds.
The administration’s plan calls for an unprecedented shift of risk from the government to individuals. If successful, it will undoubtedly have as profound an effect on the economy and on society as did the rise of the self-directed investor in the 1980s and 1990s. But whether it will improve the lot of individual investors or, as recent history suggests, expose them to either a toxic concentration of their own investing incompetence or to the machinations of the investment-products industry remains to be seen.
Dwight Cass
Editor-in-Chief
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