With Clinton Plan Education Will Be Crucial and Costly

Are we privatizing our retirement savings system?

It certainly seems that way, given President Clinton’s proposal to invest a portion of the Social Security trust fund in the stock market and to create a separate system of government-sponsored 401(k)-like retirement accounts for American workers.

But in the process of establishing universal savings accounts (USAs), we may end up creating another federal bureaucracy altogether--as we might in implementing any plan to reform Social Security that allows individuals to make their own investment decisions.

Missing thus far in the president’s proposal is any mention of how the federal government intends to undertake the unprecedented--and herculean--task of educating an entire citizenry on how to invest money.

Combined with other administrative costs, a national financial education campaign could, theoretically, eat up as much as half the money earmarked for our USAs.

Yet, if the president’s plan to set up private accounts to supplement Social Security is to come even close to working, a campaign to encourage Americans to take advantage of these accounts and to train them in how to manage their investments will be necessary, employee benefits experts say.

“Clearly, in terms of its importance, [education] is crucial to accomplish what the president’s objectives are,” said William Arnone, director of Ernst & Young’s employee financial education and counseling services unit in New York.

“To achieve this kind of behavioral change, you can’t just launch these things, throw them out and hope that people will use them,” he said.

Added Stanford finance professor William Sharpe, a Nobel Prize winner in economics and chairman of Financial Engines, an Internet-based 401(k) investment advisory service: “It would be just tragic to drop people into this milieu without some kind of help.”

It’s unclear if Washington would be willing to launch a new federal education program. But the president’s own Labor Department all but requires companies that sponsor 401(k) retirement plans to provide plan information to participants. Should we expect any less from the very government that regulates this?

“The vast majority of people do not know anything about investing--even people in 401(k) plans,” said New York Life Benefit Services President Joel Disend.

Education would be especially important if the government allows individuals to use their USAs to invest in a wide array of options--much like an individual retirement account--including stocks, bonds and mutual funds.

The possibility of thousands, perhaps millions, of untrained investors losing a portion of their retirement savings on risky bets--for instance, volatile Internet stocks--could be a political and public policy nightmare.

Thus far, it’s unclear if the administration system would go this far. In fact, many employee benefits experts believe the only credible option is to create a conservative and simple system modeled on the Thrift Savings Plan, the retirement savings plan for federal employees. It offers workers a choice of three basic investments: a stock index fund, a bond index fund and U.S. Treasury securities.

Other details to be decided include how much money the government would contribute to each account, how much money Americans would be allowed to put in, whether those contributions would be tax-deductible and how much of the contributions the government would match.

What is clear, though, is that if alternative ways to fund such a campaign are not found, the cost of providing every American a crash course in Investing 101 could eat into the very funds the president wants set aside to seed these accounts.

The White House last week proposed setting aside 11% of projected federal budget surpluses for the next 15 years to create and fund these USAs. Based on current projections--which are optimistic to say the least--that works out to about $480 billion, or $32 billion a year.

Assuming everyone in America who files a W-2 income form is eligible for a USA (which is just under 150 million people), that works out to about $215 per account per year.

That’s not a great deal of money to begin with. But wait. By some estimates, it costs a typical company $50 to $150 a year per participant to run a 401(k), depending on a number of factors. True, the federal government’s system could benefit from huge economies of scale. But employee benefits consultants note that the average account balance in a USA will probably be much smaller than the size of the average 401(k). And small accounts are much more expensive to run. (Plus, we are talking about the federal government, aren’t we?)

Assuming it costs the feds $50 per participant to manage these personal savings accounts, that would leave each account with only $165 a year. Assuming it costs $150, that would leave us each with $65. Given the cost structure, “I can’t see how it could be pulled off on such a massive scale,” said Mike McCarthy, a consultant with Hewitt Associates, the nation’s second-largest 401(k) account record-keeper. “Education is costly. Effective education is even more costly.”

Already, companies spend millions of dollars a year to provide information to employees on their various investment options. The better companies conduct interactive educational seminars with small groups of workers at a time. Still others provide employees access to software programs and Internet and intranet Web sites to become prudent investors.

Yet there is still little evidence that even this approach works that well. For instance, 401(k) plan participants still invest a dangerous percentage--often over a quarter, sometimes more than half of their savings in their employer’s stock, not realizing that diversified mutual funds are safer than investing in a single company’s shares.

Also, recent surveys show that most Americans still don’t realize they can lose money in most investment categories--including bond mutual funds.

David Castellani, senior vice president at Cigna Retirement & Investment Services, the nation’s third-largest 401(k) plan sponsor, says that although we as a people have gotten smarter over the years when it comes to finances, we still lack experience.

Late last summer, for instance, when the global financial crisis was wreaking havoc on the U.S. stock market, “the patience factor wasn’t there,” Castellani said.

To be sure, only about 3% of Cigna’s 401(k) plan participants moved money during the panic. But that’s still three times as many people who normally shift their accounts.

“People weren’t staying the course to the numbers I would have been proud of,” he said. “Emotion is still leading too many of investors’ decisions.”

Americans haven’t experienced a true, sustained bear market--where stocks decline in value 20% or more--since employer-sponsored 401(k)s became a significant component of workers’ retirement savings. What’s going to happen when stocks do decline significantly? What will we do with our 401(k)s? And what will we do with our USAs?

What makes this so worrisome is that 401(k) investors, on average, are better educated and more knowledgeable about finances than potential USA holders.

Also, the federal government won’t have the luxury of having a captive audience--such as the one companies do, during the workday--when it comes to educating the American populace.

Raymond Russolillo, director of personal financial services for PricewaterhouseCoopers in New York, predicts that any education effort the feds undertake would focus on printed materials, much like the IRS provides.

“If you’re willing to sit down and wade through the publications, you’ll probably learn some things,” Russolillo said. But it’s hardly an effective tool to teach people how to safeguard their nest eggs.

“God help us if that’s the case,” Sharpe said.

Times staff writer Paul J. Lim can be reached at paul.lim@latimes.com.