trickle down means only one thing, its throwing the bone to a dog, all the meat is already gone.

Fund industry eyes Bush's Social Security plan Vanguard, Barclays other index fund cos. may benefit

BOSTON (CBS.MW) -- President Bush's plan to reform Social Security could bring a rush of investor cash to the U.S. mutual fund industry to manage -- $75 billion a year by one estimate -- and companies specializing in index funds will likely be the first to benefit, analysts said.

Bush, who has pledged to make Social Security reform a priority during his second term, advocates allowing younger workers to set up personal accounts within the retirement program in order to give them a choice in how the money is invested.

Despite what may seem like a windfall, the $7.6 trillion U.S. mutual fund industry is approaching with caution the prospect of putting a large chunk of the huge Social Security program in private hands. If lawmakers opt to offer individual accounts, investors must be protected and educated, the industry's main trade group says.

"Many participants in the Social Security system may have little or no experience with long-term investing," the Investment Company Institute said on its Web site, adding that the creation of an individual account program would need to be preceded by "a significant public education campaign."
[the country will need some Certified Financial Planners]

At least initially, the government is likely to see index funds - which track broad-based indexes such as the S&P 500 -- as appealing investment vehicles because "you need a big, safe kind of investment" and a limited number of options, Ken Worthington, an analyst at CIBC World Markets, said.

"You need a relatively limited number of options because the administration of 130 million very tiny accounts is extremely onerous and expensive," the analyst said. "So by limiting choices to index funds, you just let people participate in the market."

Potential big winners

Big purveyors of those funds - Vanguard, State Street Corp. Barclays - would have the best chance of winning government contracts to manage the money, Worthington said.

"They've got the scale to manage the money," he said, adding that Fidelity, the biggest U.S. mutual fund company, would be less well-positioned than Barclays.

Fidelity managed $41.9 billion in index fund assets as of Sept. 30, including stock and bond fund indexes. Barclays Global Investors, the investment management arm of Barclays PLC, managed $817 billion of index fund asset as of Sept. 30. The possibility of government contracts could be one reason Fidelity recently cut fees on five equity index funds, Worthington said.

"If they can get to $50 billion of domestic equity index assets, that puts them in the game," the analyst said.

Jim Lowell, editor of Fidelity Investor, an independent newsletter based in Needham, Massachusetts, also speculated that Fidelity's fee cuts were linked to the possibility of managing Social Security money.

"The wildcard was obviously the outcome of the election, but Fidelity is smart enough to be able to both do the right thing and the smart thing at one and the same time," Lowell said.

Fidelity spokesman Vin Loporchio said, however, that over the past year and a half Fidelity has cut fees and commissions on a number of products - including the equity index funds - in an effort to benefit its customers. The index fund fee cuts were unrelated to Social Security, he contended.

Worthington said that, as the biggest 401(k) provider, Fidelity is well-positioned to benefit from the second round of Social Security privatization. That should occur four to five years after the first round as accounts grow larger and more profitable owing to economies of scale.

"They deal with a lot of small accounts," the analyst said, adding that T. Rowe Price, another big 401(k) provider, is also likely to benefit.

Worthington, who came up with the $75 billion of manageable assets estimate, arrived at the figure by estimating that 100 million of 130 million taxpayers would opt to invest some of their Social Security money in private accounts over time. Assuming the contributions are capped at $1,000 a year, Worthington estimates the average annual contribution at $750.

To put the $75 billion into perspective, the industry took in about $200 billion a year in the eight years from 1996 to 2003, the analyst said.

Other considerations

Geoff Bobroff, a mutual fund industry consultant based in East Greenwich, Rhode Island, said the $75 billion a year may not be the boon it seems for the fund industry.

"If it's only good for a handful of firms, it's not good for the industry," Bobroff said, adding that even companies most likely to benefit might not want to. "These index funds aren't going to be happy with a lot of small accounts with high activity because it makes the expense ratios higher."
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Robert Reich, Secretary of Labor under President Clinton, calls Bush's plan for Social Security reform "a very dangerous idea" that would bankrupt the system.

If I were to take what I actually knew to be true about a person’s profession and their professional affiliations, I could make some substantially erroneous assumptions I think? Especially if I gave no consideration to that individual's prior statements. And image the inferences I could come up with if I knew nothing about that persons profession.