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Friday, February 20, 2015

'Investment Charges When Mexico Privatized Social Security'

What happened after Mexico privatized Social Security?:

Investment Charges When Mexico Privatized Social Security, by Tim Taylor: If many people start making choices about how to invest their retirement assets, how much of their money will end up in the hands of financial advisers? The answer will of course vary across countries and situations, but Justine Hastings explains the dispiriting outcome in Mexico in "Privatizing Social Security: Lessons from Mexico," appearing in the latest NBER Reporter (2014, Number 4).
When Mexico privatized its Social Security system in 1997, it wanted to avoid a situation where people would make risky investments with their retirement accounts, In fact, the regulations that it set up were so tight that everyone was required to have essentially the same investment. Hastings writes:
"Mexico launched a fully-privatized defined contribution plan in 1997, with 17 participating fund managers which could compete to manage investors’ privatized social security accounts. Given the tight regulations on investment vehicles, fund managers each offered one, essentially homogenous investment product. Investors could choose which firm they wanted to have manage and invest — for a fee — their personal social security account. Despite the large number of competitors selling an essentially homogeneous product, management fees and fund manager profits were high."
Here's some evidence on the fees that emerged. The "initial load" is the amount of each deposit that is is immediately paid to the investment adviser. The "annual fee" is then paid each year on the balance in the account. As Hastings explains: "Fund managers charged an average load (a fee taken as a share of account contributions at the time of contribution) of 23 percent and an annual fee on assets under management of 0.63 percent, implying that a 100-peso deposit earning a 5 percent annual real return would only be worth 95.4 pesos after five years." ...

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