NEW YORK - Fidelity Investments and other fund management companies may not reap much of a windfall from President Bush's plan to establish private Social Security accounts, according to a Securities Industry Association report yesterday.
Restrictions on investment options and administrative costs may limit revenue for the firms to $39 billion over 75 years - about 1 percent of the $3.3 trillion total revenue forecast for the financial sector in that period, according to the report by the Washington-based lobbyist for the securities industry.
"Investment managers hungry for fees will need to look elsewhere," Rob Mills, SIA's director of industry research, wrote in the report. SIA supports establishing accounts.
The report represents an effort by the industry to answer critics' charges that the private accounts would be a boon for securities firms. Opponents of the accounts, such as Roger Hickey, director of the New Century Alliance for Social Security, said some estimates predict revenue for mutual fund companies of $240 billion over 10 years.
"They're low-balling this thing dramatically, in hopes people won't notice when they profit enormously," said Hickey, whose group, a coalition of 35 labor and civil rights groups, lobbies against the account proposal.
The mutual fund industry hasn't endorsed the Bush plan, though some executives predict the accounts would increase profits.
"It would be wonderful for our business model," said Wachovia Corp. Chief Executive Officer Kennedy Thompson in an interview Dec. 7 in New York. Wachovia, the fourth-largest U.S. bank, has a mutual fund division, Evergreen Investment Management Co., with $247 billion in assets under management and a retail brokerage as part of Wachovia Securities.
Paul Schott Stevens, president of the Investment Company Institute, the industry's lobbying association, said fund managers were aware the financial reward may be small, at least initially. Over time, though, he said, the accounts may benefit the industry by bringing millions of new investors to the stock market.
Industry profits may increase if workers are given more investment choices. If the program includes a second option that lets workers invest in a more extensive list of funds after accumulating $5,000 in their accounts, fees may increase to $279 billion, the report said.
Evelyn Morton, the national coordinator for economic issues at the AARP, an opponent of the accounts, declined to comment on the SIA report. She said AARP is focused on the effect of money manager fees on investors' gains, not with the profitability of the investment firms. "Our concern has always been on how administrative costs on small accounts eat into returns," she said.
The SIA report assumed that workers would be allowed to invest in a government-run program with five no-load equity and bond funds. The restrictions would reduce losses and market volatility, as well as profits, for companies, the report said. Fees for these funds will average about 10 basis points; that compares with the 73 basis points in fees that companies can charge workers participating in the second fund option.
Improving software and communications technology would further lower the fees the mutual fund firms could charge, the report said.
SIA estimated that 70 percent to 75 percent of the workers eligible for the accounts would select to use them. Of those, 44 percent would opt to participate in the broader fund selections that would generate more profits for the industry, the report said.