Efficient Frontier
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William J. Bernstein

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The best way to keep up with academic finance literature is to stay abreast of working papers circulated by the nation's leading financial economists. Unfortunately, unless you are well situated in finance's grapevine, you're not likely to see all or even many of these. No more: John P. Scordo, Esq. is now posting the most important works-in-progress on his Web site and promises to keep it updated. A list of recent articles (with their links) appears in the left-hand column of the page.

Reinventing Retirement Income in America

American workers are beginning to notice an unpleasant odor wafting from their mailboxes. Each quarter, with the arrival of their 401(k) statements, it is slowly dawning on them that there’s more to retirement investing than throwing money at the most popular growth fund around the water cooler. A few may even be starting to realize that costs matter.

Unfortunately, the real message of the Enron debacle—that a retirement system which forces every employee to be a portfolio manager and where costs are largely ignored is a disaster waiting to happen—has been lost in a far more entertaining morality play. The Lay family makes for great Doonesbury, but unfortunately obscures the larger public policy issues.

After my editorial appeared in Barron’s last fall, multiple members of the fourth estate mistook me for a pension-fund expert and asked what remedies I had to offer. I quickly learned to mumble the words "portability" and "federal pension board," then change the subject. Luckily for me, financial columnist Scott Burns and pension consultant Brooks Hamilton were in the process of doing the heavy lifting for the National Center for Policy Analysis, now detailed in an extensive report. For starters, they beautifully lay out the problem, including a shocker I had been unaware of: Because of differences in investment knowledge, highly compensated employees earned far higher returns than lower-paid ones. While this may please the Hayek-Rand crowd, it is social and political dynamite—a system that results in high returns for the top brass and low returns for the rank and file does not pass the smell test.

The study’s centerpiece is a neat exchange of commonsense features for legal safe harbor: a default professionally managed 60/40 portfolio mix for employees who do not manage their own accounts, immediate vesting, full portability, and most important of all, employer responsibility for fees. Engaging employers in the fund cost issue is essential in an arena where 3% to 4% annual expenses are not unusual.

Take a look. It’s not perfect, but it’s darned close. My two cents is, one option should be universally available—an age-determined, indexed, sliding mix of stocks and bonds managed by an independent, federally run pension board with rock-bottom expenses. I figure Gus Sauter could do it for less than 10 basis points out of a few cubicles.

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