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Would Administration costs would be too high?

If not handled properly, administration costs could eat away at investment returns, and eliminate the benefit of a PRA.  However, this problem can be minimized.  The key is to keep it simple.   

 

An example of a simple plan is the Thrift Savings Plan, used since 1986 by federal employees.  The Thrift Savings Planallows employees to invest in any combination of three funds – a broad stock index fund, a bond index fund, and a fund paying interest at the rate prevailing on long-term federal debt.  The Plan is administered by a governmental board, insulated from political influence by giving members fixed terms in office.  To further insulate against political influence, money is actually managed by private-sector firms, selected via competitive contract.  The Plan is simple and cheap!  Annual overhead charges average just one tenth of one percent (.1%) of managed assets. 

 

Of course, not all PRA participants will want to limit their investments to trustee-organized indexed funds.  For these individuals, how do we control administration costs, while promoting consumer choice and efficient financial markets? 

 

In its December, 2001 report, the Commission recommends a “two-tier structure” to balance the need for efficient administration with the desire of participants to have several investment options:

 

Initially, all collections are invested into “Tier I” of the program.  In Tier I, workers choose from a range of funds that are currently offered by the Thrift Savings Plan, plus three additional balanced funds and an inflation-protected bond fund … . When employees have accumulated a threshold account balance (say, initially, $5,000), however, they are allowed to invest that threshold balance plus subsequent contributions in a range of “Tier II” qualified private-sector funds. … The Governing Board chooses the threshold amount that is required for people to move their balances into Tier II so that it would be feasible for such accounts to be charged low transaction costs without the need for price caps. …

 

Funds in both Tiers cannot charge sales “loads” or other marketing fees on entry or exit.  Instead, all fees must be included in one annual charge and clearly stated as a percentage of assets.

 By using this two-tier structure, administration costs can be controlled, while consumer choice is maintained.