IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this book chapter or follow this series

Mutual Funds and Institutional Investments: What Is the Most Efficient Way to Set Up Individual Accounts in a Social Security System?

In: Administrative Aspects of Investment-Based Social Security Reform

  • Estelle James
  • Gary Ferrier
  • James H. Smalhout
  • Dimitri Vittas

One of the biggest criticisms leveled at defined contribution individual account (IA) components of social security systems is that they are too expensive. This paper investigates the cost-effectiveness of three options for constructing funded social security pillars: 1) IA's invested in the retail market with relatively open choice, 2) IA's invested in the institutional market with constrained choice among investment companies, and 3) a centralized fund without individual accounts or differentiated investments across individuals. Our questions: What is the most cost-effective way to organize a mandatory IA system, how does the cost of an efficient IA system compare with that of a single centralized fund, and are the cost differentials large enough to outweigh the other important considerations? Our answers, based on empirical evidence about mutual and institutional funds in the U.S.: The retail market (option 1) allows individual investors to benefit from scale economies in asset management, but at the cost of high marketing expenses that are needed to attract and aggregate small sums of money into large pools. In contrast, a centralized fund (option 3) can be much cheaper because it achieves scale economies without high marketing costs, but gives workers no choice and hence is subject to political manipulation and misallocation of capital. Mandatory IA systems can be structured to get the best of both worlds: to obtain scale economies in asset management without incurring high marketing costs or sacrificing worker choice. To accomplish this requires centralized collections, a modest level of investor service and constrained choice. The system of constrained choice described in this paper (option 2) is much cheaper than the retail market and only slightly more expensive than a single centralized fund. We estimate that it will cost only .14-.18% of assets annually. These large administrative cost savings imply a Pareto improvement so long as choice is not constraine

(This abstract was borrowed from another version of this item.)

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.nber.org/chapters/c7469.pdf
Download Restriction: no

as
in new window

This chapter was published in:
  • John B. Shoven, 2000. "Administrative Aspects of Investment-Based Social Security Reform," NBER Books, National Bureau of Economic Research, Inc, number shov00-1, May.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 7469.
    Handle: RePEc:nbr:nberch:7469
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Web page: http://www.nber.org
    Email:


    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Shukla, Ravi K. & van Inwegen, Gregory B., 1995. "Do locals perform better than foreigners?: An analysis of UK and US mutual fund managers," Journal of Economics and Business, Elsevier, vol. 47(3), pages 241-254, August.
    2. Ippolito, Richard A, 1992. "Consumer Reaction to Measures of Poor Quality: Evidence from the Mutual Fund Industry," Journal of Law and Economics, University of Chicago Press, vol. 35(1), pages 45-70, April.
    3. Robert W. McLeod & D. K. Malhotra, 1994. "A Re-Examination Of The Effect Of 12b–1 Plans On Mutual Fund Expense Ratios," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 17(2), pages 231-240, 06.
    4. Dermine, Jean & Roller, Lars-Hendrik, 1992. "Economies of scale and scope in French mutual funds," Journal of Financial Intermediation, Elsevier, vol. 2(1), pages 83-93, March.
    5. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    6. Miles Livingston & Edward S. O'Neal, 1996. "Mutual Fund Brokerage Commissions," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 19(2), pages 273-292, 06.
    7. Chordia, Tarun, 1996. "The structure of mutual fund charges," Journal of Financial Economics, Elsevier, vol. 41(1), pages 3-39, May.
    8. McLeod, Robert W & Malhotra, D K, 1994. "A Re-examination of the Effect of 12B-1 Plans on Mutual Fund Expense Ratios," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 17(2), pages 231-40, Summer.
    9. D. K. Malhotra & Robert W. McLeod, 1997. "An Empirical Analysis Of Mutual Fund Expenses," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 20(2), pages 175-190, 06.
    10. Malhotra, D K & McLeod, Robert W, 1997. "An Empirical Analysis of Mutual Fund Expenses," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 20(2), pages 175-90, Summer.
    11. Livingston, Miles & O'Neal, Edward S, 1996. "Mutual Fund Brokerage Commissions," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 19(2), pages 273-92, Summer.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:nbr:nberch:7469. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.