So my 100,000 in 1999 went down to 50,000 and is now back to 70,000, big deal. After contributions of about 12,000 and deductions for fund expenses, etc., etc., most fund investors are treading water, at best. Investment firms, i.e., the ones managing the funds, are doing just fine.

Typically, bubble type equity implosions can take 10,15,20 years to recover previous highs. If we are in that kind of environment now, investing in indicies or expensive mutual funds with a "buy and hold" mentality might just get you nowhere, slowly.

Tom:

"Since 1999, the average balance had risen 17.1 percent."

If you read the entire article, balances have risen primarily because of additional contributions, not because of real returns. In fact, for the group with the largest pre-existing balances (the 50-59 age group), their accounts are still down by 9.3% over that same period. I'm a bit younger than that, but that pretty much mirrors my own experience. I'm up from the bottom of the trough by about 25%, but down from the 1999 peak by about 10%.

Also, these numbers appear to reflect year-end 2003 balances. The recent correction has thus made things worse than the article would indicate, probably by another 2-5% (depending on what your portfolio is weighted towards).

5 years with worse than zero return is scarcely a recommendation for private accounts, unless you expect people to successfully time the markets. Buy-and-hold has not been an optimal strategy for some time now.

A privatized system would require them to time the market by law. A 59 year old who has his money in the market is an idiot.

Note also that the contributions to those accounts are before taxes, so you'd have far less if you'd not been putting money in.

oj-

The avg balance has risen 17.1% since 1999 while the s&p is off about 25% and the Dow is off about 10% implies, at least to me, that contributions and company matches have made up the difference. Absolute returns are probably negative. Yields within most 401k plans have been almost meaningless in the current low yield environment since what cash flow is generated is mainly consumed by fund charges and miscelaneous fees. Real returns on The vast majority of all mutual funds since the market highs is negative.

Tom:

How can I get a job with your company? 17% is awfully generous, though illegal.

oj-

17.1% is over a THREE year period.

Of course it is, I'm a dolt. Still impressive during a "bursting bubble".

oj-

Last year my clients averaged returns of between 20 and 40% aside from further contributions. Average yields (cash flows) were 5.25%. Mutual funds were NOT components within their portfolios.

"A privatized system would require them to time the market by law."

What you are referring to here is not market timing, it is an age-related form of investment regulation. Market timing implies you know when the market is going to go up and when it is going to go down, and buy and sell the market accordingly. Frankly, that is the only thing that could eliminate the possiblity of large groups of dispossessed citizens in your scheme. And it is impossible.

Instead, you want to mandate that groups of participants, segregated by age, will be required by law to put their investments in certain classes of assets (for example, in bonds or CD's when they near retirement age). The drawbacks to such a system ought to be obvious to even a casual observer. For one thing, who is going to mandate the cutoff ages? For another, what happens to the poor suckers who, in their last five years in the equities band of your system, experience a meltdown in their assets, and are then "required by law" to move their investments over to debt instruments with no chance to cash in on an equity recovery?

And finally, why you are talking about this hypothetical system as if it is similar to a 401K (with tax deductability) when Social Security is not set up that way? The advantage you attempt to impute to my tax-DEFERRED portfolio would not exist in this new system. Frankly, even if it were tax-deferred, unless there are significant bracket shifts for participants during the course of the plan, one could still experience a double-whammy -- losing a significant percentage of your tax-deferred investment and then still having to pay nearly the same rate on it when you withdraw the money.

I used to be reflexively in favor of a privatized system, but the last few years have given me considerable pause. I don't know what the solution is, but it can't be expressed on a bumper-sticker.

HT:

People would have to ramp down towards safer investmentrs by some cutoff date, even if they'd have had more a few years earlier or might have more a few years later, and it would be pre-tax income that is contributed.

Here's your bumper sticker: A mandatory 401k.

Just about anything would prove to be a better "investemnt" than social security which is a transfer payment liable to be rescinded or taxed or re -configured any way a future congress may decide. There is no "trust fund". Do away with the tax and strengthen the social institutions which help to provide for the elderly. Return responsibility to states, localities and families and stop taxing their savings. Intensely regulated investment portfolios may work for private investment accounts but the costs must be kept low and the asset allocation models must be appropriate. 529 plans are a good example of what can go wrong.

with so few choices, so standard, and so many participants the costs should be very low

oj-

After thinking about the subject a little more..

Investing through government mandate will probably fail. The entire nature of investing within highly regulated models will probably fail since it is too easy for professional traders to make money on the long or short side by simply anticipating non market driven investing. Capital formation and responsibility devolved from the alienated feds to the state and localities is the only long term solution. The social insitutions which served free people so well in the past need to encouraged. Everything else is a band-aid.

Tom, you're right on. If everyone's money is going into the same bucket, regardless of risk/reward profiles, then returns will be abysmal. Someone will make money, but it won't be the retirees.

OJ, here is a shocker for you - bonds can lose value. I know that you still can't accept the fact that stocks can lose value, but it is true. As rates rise over the next 10 years, bond portfolios will get creamed. Someone who will be retiring in the next 5 years should be in cash or short term instruments.

Robert-

Thanks, however I don't fully agree with you about bonds. Properly constructed bond portfolios will not get creamed. They may fluctuate in value and investors will suffer if they don't really belong in bonds. Putting bond portfolios together takes time and a bit of work but as long as inapropriate risks are avoided, investors will generally not lose money over the long term.

Three choices:

(1) S&P 500 index fund

(2) I-Bonds (Are those the ones that guarantee inflation rate plus?)

(3) Money Market

Robert:

If the economy goes into Deprtession as you predict it won't matter what anyone owns.

Set guaranteed minimum annual payments from privatized SS market accounts.
Charge each account an annual insurance fee, to be put into a "rainy day" fund, which would make up the shortfall between payouts during down markets and the guaranteed minimum.

Michael-

Government run "social insurance trust funds" is what got us into this mess to begin with.

Tom, maybe your clients did OK or better than OK.

If everybody takes part, then I can tell you exactly how they'll doi -- average.

Orrin seems OK with that, by recommending index funds.

Fair enough.

But it's either/or. Either it's Lt. Milo Minderbinder's scheme and everybody gets a share; or it's a free-for-all.

It cannot be both.

fast and furious 3 http://fastandfurious.order.gb.com on 09.09. 2004 11:57:51 by Buy http://buy.order.gb.com

The SEC Weighs in on 529 Savings Plans

Regulators point out potential pitfalls with these plans.

Last month, SEC Chairman William Donaldson responded to an inquiry made by the House of Representatives Committee on Financial Services regarding costs and existing disclosure requirements of 529 college savings plans. Committee Chairman Michael Oxley asked Donaldson to determine the validity of recent press reports claiming that 529 plan expenses were "surprisingly high" and that the costs may soak up the tax benefits provided by Congress. Additionally, Oxley wanted to know how 529 plans were regulated and if 529 investors get considerably less information than mutual fund owners do. The SEC did not conduct a full review, but it spoke with several plan sponsors and collected publicly available information to reach its conclusions. We've summarized its findings and added our own opinions below. The complete SEC report can be found here.

Who's responsible for regulating 529 plans?
Donaldson's report makes clear that the SEC is not the primary regulator of 529 plans. Because they are offered by individual states, the plans are municipal securities. That being the case, the Municipal Securities Rulemaking Board (MSRB), which also governs municipal bonds, is the chief regulator.

That said, the SEC has not washed its hands of 529 plans. The SEC can indirectly regulate 529 plans because federal securities laws apply to brokers who sell securities, including 529 plans. Furthermore, the SEC oversees the MSRB, so it has final approval over rules the MSRB puts in place.

Are investors getting enough information?
Given the aforementioned regulatory framework, 529 plans are exempt from several reporting and disclosure mandates that apply to mutual funds. The SEC found that investors get little or no information about underlying funds, and the disclosure investors currently get isn't standardized, which makes comparing 529 plans difficult. Also lacking is a requirement to provide periodic reporting including a discussion of performance and a list of portfolio holdings, unless state law requires it.

We think a frank discussion of performance should be required of all investment options in 529 plans. The returns of relevant benchmarks should accompany the performance of the investment options and plan sponsors should explain why the plan's investment options lagged or surpassed market averages. That type of information should go a long way toward helping investors evaluate the quality of the 529 plan.

How is the investment manager selected?
The SEC review couldn't find any explanation by 529 plans regarding their selection process for choosing investment managers. We believe this is one area that needs more attention from regulators. Is it a coincidence that Wisconsin-based Strong Capital Management is the investment manager for both of Wisconsin's 529 plans? We think not. This process needs to be opened up for public scrutiny. Investors deserve to know what criteria were used to pick the manager, as well as details regarding how the fees they pay are divided up among states and managers.

Disclosure on costs is key.
Regarding costs, the SEC found that 529 investors can be hit with a variety of fees that come in the form of enrollment fees, account maintenance fees, program management fees, and administrative fees. It found that the primary difference when compared with mutual funds is the additional layer of fees that is charged at the plan level. Those costs are typically added to management fees for the underlying funds.

We encourage regulators to look into the disclosure of fees. Often detailed information on fees is buried at the end of a 100-page-long disclosure document. Even after that information is located, investors often must add together several different levels of fees to figure out the total costs of the plan. This complexity is wholly unnecessary. Investors who don't see a plan's total costs clearly outlined should take that lack of disclosure as a warning sign.

Where do we go from here?
All the talk about regulation is welcome. We see no reason for 529 investors to get less information than mutual fund investors get. Certainly, 529 plan sponsors face some challenges due to the structure of 529 plans, but that is no excuse for the current lack of accessible information.

Regulation is one route to improving 529 plans. But a quicker and perhaps better path is for individual states to step up to the plate and improve their 529 plans before the regulators take control. States must recognize that in bundling the assets of thousands of investors, they have considerable purchasing power when it comes to negotiating fees with fund companies. By improving transparency and disclosure, states can win over skeptical investors and generate economies of scale.
529 Plans are Stillin Danger

Our main concern with the SEC report is that the focus has been on problems with 529 plans. We agree that several plans have major issues, including exorbitant costs, but that is only part of the story. Among the more than 70 plans available today, investors have many options with reasonable costs and solid investment options. While disclosure is far from perfect, investors can get most of the information they need with a little digging.

Our fear is that the SEC's findings may dissuade parents from investigating 529 plans further. That may be the biggest mistake to make. When it comes to saving for college, the top 529 plans available today make a compelling case.

Nitish Tewary