Felix Salmon

Occupy defined-benefit pension funds!

Felix Salmon
Apr 19, 2012 03:32 UTC

I’m working my way through The Occupy Handbook, your excellent one-stop shop for analysis of the financial crisis and everything about it. A lot of really big names have pieces here: among the authors you’ll find Michael Lewis, Paul Krugman, Gillian Tett, John Cassidy, Raghuram Rajan, Bethany McLean, Daron Acemoglu, Carmen Reinhart, David Graeber, Nouriel Roubini, Pankaj Mishra, Ariel Dorfman, Barbara Ehrenreich, Peter Diamond, Brad DeLong, Martin Wolf, Scott Turow, Robert Reich, David Cay Johnston, Eliot Spitzer, Lawrence Weschler, Tyler Cowen, Jeff Madrick, Dan Gross, Jeff Sachs, and even Paul Volcker. (Full disclosure: I’m in there too.)

One author who might not be familiar to a financial audience is Arjun Appadurai, who has an excellent short chapter entitled “A Nation of Business Junkies”.
“Business news was a specialized affair in the late 1960s,” he writes. “Now it is hard to find anything but business as the topic of news in all media.”

He explains:

Look at the serious talk shows, and chances are that you will find a CEO describing what’s good about his company, what’s bad about the government, and how to read his company’s stock prices…

Turn to the newspapers and things get worse. Any reader of the New York Times will find it hard to get away from the business machine. Start with the lead section, and stories about Obama’s economic plans, mad Republican proposals about taxes, the euro crisis, and the latest bank scandal will assault you… Turn to the sports section: it is littered with talk of franchises, salaries, trades, owner antics, stadium projects, and more. I need hardly say anything about the Business section itself, which has now become virtually redundant…

Go through the magazines when you take a flight to Detroit or Mumbai, and there is again a feast of news geared to the “business traveler”. This is when I catch up on how to negotiate the best deal, why this is the time to buy gold, and what software and hardware to use when I make my next presentation to General Electric.

I thought of Appadurai’s chapter earlier today when I was talking to a fund manager at a conference in DC. He was talking about the move from defined-benefit to defined-contribution pension plans, and was bemoaning the fact that people who invest in defined-contribution plans have seen returns not only below the returns in the stock market or the bond market, but even below the level of inflation. The solution, he said, was more education: we had to teach people about the power of diversification, the intelligence of passive investing, and so on and so forth.

My feeling was that such attempts would never work. The investment returns of people with defined-contribution pensions are woefully low — much lower than the returns seen by the managers of defined-benefit schemes. And the difference, to a first approximation, is rents being extracted by the financial-services industry. That’s the industry which does all of the educating: so it’s unrealistic to assume that it’s going to educate people and thereby reduce its own income.

Besides, as Appadurai says, the US population has never been more educated about matters financial than it is now. We can try to improve the level of education even further. But a little financial education can be a dangerous thing, if it instils overconfidence. And what’s more, there’s zero empirical evidence that educated investors have higher realized returns. Besides, you can’t hope to effectively educate everybody.

Much better, I think, to allow people to invest alongside the defined-benefit scheme of their employer, and accept the returns of that scheme. Most employers still have some kind of legacy defined-benefit scheme, and those schemes, as a rule, tend to be invested pretty sensibly. Those pension funds should accept defined-contribution money alongside their defined-benefit money: it would beef up their AUM and thereby their negotiating power, while at the same time delivering higher returns to the company’s employees.

Some employees, of course, will think that they are very clever and will be able to get large returns for themselves. But most of us aren’t that hubristic, and consider asset-allocation decisions and the like to be something of a chore. Give us the opportunity to outsource those decisions to somebody acting on our behalf, and we’ll jump at it. We might not get the same implied returns as the lucky people on defined-benefit plans. But at least we’ll have our money professionally managed, at little or no cost.


dWj, if they were to do so, would you trust them with your money?

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The unemployment debit-card scandal

Felix Salmon
Nov 14, 2011 23:17 UTC

Few people despise paper checks as much as I do. They’re expensive, insecure, anachronistic, and dangerously reliant on the less-than-stellar delivery record of the US Postal Service. Recently, banks in my neighborhood have been swapping out their ATMs with new machines which read checks — something which must be a hugely expensive investment, for them, in a technology which deserves to be killed off with extreme prejudice.

So I’m a great fan of the way in which states including Oregon, South Carolina, and California are doing away with the unemployment check. If you want unemployment benefits, have them directly deposited into your bank account. Or, if you’re unbanked or otherwise don’t want to do things that way, get your unemployment benefits on a prepaid debit card.

Except, it hasn’t quite worked out that way. HuffPo’s Janelle Ross has been all over this — she started with an exposé of the fees associated with the prepaid cards, and followed up with a tough piece about the cozy relationship between South Carolina and Bank of America on this front. And then today, American Banker’s Kate Berry has found something truly evil going on in California:*

The states sell banks exclusive contracts to run their benefit-card programs, giving Bank of America Corp., JPMorgan Chase & Co. and their rivals millions of new customers in one fell swoop. These banks then collect uncapped, higher fees from merchants with every card swipe, often kicking back some profits to the states as part of revenue-sharing agreements. California, for example, has earned $7.7 million from Bank of America since December 2010…

B of A spokesman Jefferson George says it was California’s decision not to offer direct deposit. It takes 24 hours for B of A to transfer funds, he says, adding that further delays are caused by the other banks.

Jill O’Connell, chief of accounting for the California Employment Development Department, says the state did not offer direct deposit to recipients because doing so would have required the state to hire more employees to track the deposits.

This is, simply, bonkers. I have no idea what “hire more employees to track the deposits” means, but if California is getting $7.7 in kickbacks from BofA, it could probably afford to hire a few more employees with that money. It’s a no-brainer that direct deposit is the easiest, cheapest, and most efficient way of getting money from the state to the unemployed. And yet, faced with a first-best option like that, California doesn’t offer it, choosing to take BofA’s $8 million bribe instead. And BofA is laughing: the prepaid debit cards aren’t subject to the Durbin cap on interchange fees, so it can charge merchants through the nose every time one of these cards is used.

As Ross’s stories show, people on unemployment benefits live very stretched, high-stress lives where pennies count. And they simply can’t afford the fees that banks like BofA and US Bank are levying with abandon on some of America’s poorest and neediest. The fact that the states are going along with the banks on this is just gruesome. Check this out:

The state asserts that people who are prudent, timing their withdrawals while adhering to the limits, can secure all of their funds without charge.

“With careful use, South Carolina cardholders can avoid paying any fees,” said Fairwell.

But people who rely on such cards to collect their benefits have a difficult time hewing to polite language when they hear such characterizations.

“That’s bullshit,” said Sandra Gortman, 55, a Columbia resident who says she incurred some $10 in fees within the first weeks of using her card. “Excuse me. But, really, there is no way given the way you have to live when you have very, very little money and copious amounts of stress, to avoid paying fees.”

I’m sure the banks have been buttering the states up nicely. But let’s hope the Consumer Financial Protection Bureau, or someone, steps in and brings some common sense to bear. Because right now those who can least afford debit-card fees are being essentially forced to incur them. And there’s absolutely no reason why people getting unemployment benefits should have to worry all the time about debit-card fees and how to avoid them. Especially not when they already have bank accounts which their money could be going into directly.

*Update: Berry’s piece has now disappeared, to be replaced by a placeholder saying only that “an updated version of this story will appear soon.” The state of California says that Berry’s original piece contained errors, and specifically that California does offer direct deposit, just not with the first payment. It’s all a bit confusing; I’m looking into it.

Update 2: Here’s my exchange with someone from California’s EDD. In brief, they do offer a direct deposit option, though one has to get a debit card anyway, and they do not go so far encourage people with bank accounts to use direct deposit.


Knibblet–Felix doesn’t like payment systems that don’t generate fees for banks.

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