Originally created 01/30/05

Larger companies want Social Security system that is stable



NEW YORK - There's been a curious silence on Wall Street since President Bush proposed that Social Security be privatized.

It might seem that securities firms would be in for a windfall under the plan - the billions of dollars that would pour into private investment accounts would generate millions of dollars in new fees and commissions. But the big Wall Street firms haven't been publicly supportive of the idea, probably because they're not sure how profitable those accounts will be.

"The industry as a whole is going to be very quiet about this," said Greg Valliere, the chief strategist at the Stanford Washington Research Group, the policy analysis arm of Stanford Group Financial Services. "People might look at this and see some kind of sweetheart deal, and that's not the case at all. The industry itself is split, and nobody wants the attention."

The ambivalent camp includes some of Wall Street's biggest names - Morgan Stanley, Merrill Lynch & Co., and JP Morgan Chase & Co., for example. These and other Wall Street icons have little to say, other than to reiterate their desire for a Social Security system that pays benefits and stays fiscally responsible.

Private Social Security accounts are expected to look a lot like 401(k) retirement plans or 529 college savings plans - they will be small holdings, built with minimal deposits every month, offering low fees for the companies that run them. And that, for the largest Wall Street firms, is the problem.

Sources at the big companies, speaking on condition of anonymity, said that getting in on personal investment accounts just isn't in their business plan. They invest on a larger scale, handling accounts that have minimum balances in the tens of thousands of dollars.

"Small money" accounts like the proposed Social Security accounts require big investments in infrastructure and personnel, since investors must be able to rebalance their investments at any given time - although the vast majority of individual investors never do.

"I don't see this standing out on anybody's income statement," said Lincoln Anderson, the chief investment officer at LPL Financial Services and an economic adviser in the Reagan Administration. "It doesn't seem to jump out as a high profit margin business. People put their money in and leave it in, so there's not a lot of big activity that goes along with these accounts. And that means little or no fees."

The firms most interested in privatization, then, will be those who already specialize in managing small money, such as Fidelity Investments, State Street Global Advisors or The Vanguard Group - the top three 401(k) companies in terms of assets under management. They already made the investment in the infrastructure and have experience in managing small individual accounts. Even then, profits are likely to remain small.

"Is anyone going to make a lot of money on this per se? The answer is probably no," Mr. Valliere said. "These accounts would be expensive to manage, and the back office charges would be considerable. And if this actually happened, Congress would make sure nobody made a nickel."

Yet the Securities Industry Association, a lobbying group of 43 Wall Street firms, has come out in support of privatization. That's because there's one thing that most everyone on Wall Street can agree upon: Getting more Americans investing would be a good thing.

"If you get all these folks with private self-directed accounts, that may stimulate interest in other accounts," Mr. Valliere said. "More interest in investing could lead to more business, the kind of business that Wall Street really wants."

And certainly, a huge surge of money going into the markets - $54 billion per year, according to a research report released last week by Merrill Lynch economists Kathy Bostjancic and David Rosenberg - will increase demand for stocks and bonds. Mutual fund managers will have a field day, even if Social Security savings accounts are restricted to just a few risk-adverse fund options. Stock prices will rise and bonds - especially corporate bonds - also will see more investment.

Ms. Bostjancic estimated that an account could have annual capital appreciation of 6.8 percent, a term she calls conservative. "Honestly, we just don't know how the markets will ultimately digest this kind of infusion of cash."