SEC Sees New Role in Social Security Privatization

February 5, 2001 ( ) - If individuals are allowed to make individual investments in their Social Security accounts, it will force the Securities and Exchange Commission into a new role, a SEC commissioner said.

That new rule will include more investor education, corporate governance, and the disclosure of more material information, according to SEC Commissioner Paul Carey.
What prompted the Commissioner’s comments was a campaign pledge by now-President George W. Bush  that individuals would gain more control over the way their social security contributions are invested, including taking a discretionary role in their allocation.
With the prospect that millions of Americans will have an active role in selecting investment for an as yet undetermined amount of their social security contributions, the SEC will be on the front lines of providing investor education, the commissioner said.  And that has not been an area it has ever focused on, on such a huge scale, the commissioner said.  Potentially, some 140 million new accounts could be created.
Among the concepts individuals should be familiar with before they make their own investments include,  risk and reward, company disclosures, and hidden trading and mutual fund administrative fees, Carey said.
Some proponents have called for allowing individuals to use as little as 2% of Social Security assets for discretionary investing.  But Carey said that this approach could fail to meet its goal for millions of low-income workers since administrative fees would eat up any gains.  This would create a “portfolio marching in place.” 
Francis Cavanaugh, the first executive director of the Federal retirement Thrift Investment Board, earlier told that high administrative expenses and a lack of employer expertise would not produce any benefits for many people in the huge Social Security program.
“But there are many more small businesses which are not sophisticated when it comes to 401(k) plans, and many of their employees are not even literate in the language of business. There is no 401(k) plan around that is not heavily dependent on the employer’s administrative expertise and that would just not be there is mass privatization would happen,” Cavanaugh said.