Kevin Drum

401(k) Retirement Funds Are a Rip-Off

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| Wed May. 1, 2013 8:14 AM PDT

Matt Yglesias has a dyspeptic take on how the 401(k) retirement industry works:

  • Poor people get absolutely nothing.
  • Wealthy people who would have had large savings anyway get a nice tax cut that offers no meaningful incentive effect.
  • For people in the middle, the quantity of subsidy you receive is linked to the marginal tax rate you pay—in other words it's inverse to need.
  • A small minority of middle class people manage to file the paperwork to save an adequate amount and then select a prudent low-fee broadly diversified fund as their savings vehicle.
  • Most middle class savers end up either undersaving, overtrading, investing in excessively high-fee vehicles or some combination of the three.
  • A small number of highly compensated folks now have lucrative careers offering bad investment products to a middle class mass market based on their ability to swindle people.

Dyspeptic but basically accurate! The first four bullets are, unfortunately, just business as usual in America. It's the last two that really rub salt in the wounds. But it's simply a fact that a great number of 401(k) funds are extremely poorly suited as retirement vehicles and suck up far more in fees than can possibly be justified.

But the news is even worse than that! Last year the Labor Department issued new rules that forced funds to disclose their fees in an easily understood manner. The idea was that if they're going to rip you off, at least now you'll know how much they're ripping you off and maybe switch to a more honest fund. But it didn't do much good:

After the new fee disclosure statements went out, roughly the same percentage—half!—of participants said that they still do not know how much they pay in plan annual fees and expenses, according to a recent survey by LIMRA, an association of insurance and financial services organizations.

....For those 401(k) participants who said they thought they knew how much they paid in fees, most of them were way off base. One out of four participants thought they paid 25% or more in fees, 16% thought they paid between 10% to 24% in fees, and 30% thought they paid between 2% and 9% in fees. Only 28% of participants thought their fees were less than 2%.

That group is the closest to reality. On average fees and expenses range between 1 to 2 percent, depending on the size of the plan (how many employees are covered) and the employees’ allocation choices (index funds versus actively managed funds), says LIMRA.

Basically, this suggests that people have no idea what "fees" even means, which bodes ill for the power of disclosure to have any effect. If you think that 2 percent is really low, then you're getting ripped off even though you do know the fee structure of your fund.

The era of the defined-benefit corporate pension is gone, and it's not coming back. People switch jobs too frequently for it to work anyway. The only real options are either private plans like 401(k)s, which ought to be reformed to make them better, more honest retirement vehicles, or higher Social Security payments. Most likely, both. The former would help the middle class and the latter would help the poor and the working class. The upper middle class and the wealthy can fend for themselves. They're doing pretty well already.

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High-Speed Trading Fairy Tales Come to Chicago

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| Tue Apr. 30, 2013 10:25 PM PDT

The Wall Street Journal reports today that high-speed traders on the Chicago Mercantile Exchange are exploiting the ability to get confirmation of their own trades a few milliseconds before the rest of the public. Here's an example of how it works:

Firms can use their early looks at CME trading data in several ways. One strategy is to post buy and sell orders a few pennies from where the market is trading and wait until one of the orders is executed. If crude oil is selling for $90 on the CME, a firm might post an order to sell one contract for $90.03 and a buy order for $89.97.

If the sell order suddenly hits, the firm's computers detect that oil prices have swung higher. Those computers can instantly buy more of the same contract before other traders are even aware of the first move.

I've read enough about high-speed trading that I can't even get too worked up about this. The rich get richer, regular traders pay the price, etc. etc. What really makes this story worthwhile is hearing the high-speed traders try to justify what they do:

Officials with Virtu Financial LLC, a high-speed trading firm in New York, view a slight head start as good for the overall market, according to a person familiar with their thinking. The person said the data helps traders who buy and sell futures contracts throughout the day manage risk and post more quotes that benefit other buyers and sellers. The person said Virtu doesn't use the information to amplify its profits by anticipating moves elsewhere in the market.

Proponents say eliminating the ability of parties in a trade to get information slightly in advance could lead to less-liquid markets because some firms would be inclined to trade less due to the greater risks.

Yep, you read this right. Giving a few select traders an unfair advantage over everyone else is actually good for everyone else! Why? Because if these lucky traders didn't have an unfair advantage they wouldn't make lots of extra sure-thing trades, and these sure-thing trades benefit the entire market because.....

Um, liquidity! It's the last refuge of the scoundrel and the first refuge of the high-speed trader. They create liquidity, baby, and without that, the entire commodities market, which is famously liquid and always has been, might just seize up and die. Seriously. That's their story.

I don't even have the energy to mock this lame nonsense right now. Maybe Felix Salmon will do it in the morning. In the meantime, I'll just leave you with a further fascinating little nugget. It turns out that the time advantage for high-speed traders is different for different commodities: 2.4 milliseconds for silver futures, 4.1 milliseconds in soybean futures and 1.1 milliseconds for gold futures. Feel free to speculate on why this might be in comments.

Quote of the Day: Let's Go To War In Syria

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| Tue Apr. 30, 2013 5:43 PM PDT

From John McCain and Lindsey Graham, beating the drums for yet another military intervention in the Middle East:

There are many options at our disposal, including military options short of boots on the ground in Syria, that can make a positive impact on this crisis, which is destabilizing the region.

I have one question for McCain and Graham about this: what if these "options" don't work? What's next? Have they given this even a moment's thought?

I know this is hardly a novel insight, but the crisis in Syria has really rubbed my nose in just how capriciously conservatives have come to treat war. They no longer even consider it an especially difficult decision to make, let alone a last resort. It's just a routine extension of foreign policy.

The chances that an American intervention could have a positive outcome in Syria strike me as close to zero. Nevertheless, the war crowd is raring to dive in anyway. They have no idea what we should do; no idea what the outcome might be; and most importantly, seemingly no idea of how many ways the entire operation could go wrong. All they know is that there's a bad guy somewhere in the vicinity of Israel, so we ought to go in and kick his ass.

It's astonishing. I'm no isolationist, and I'm no pacifist. But at the very least I think war should be treated as a deadly serious matter. When did it become such a casual thing?

New Obamacare Application Demonstrates the Power of Framing

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| Tue Apr. 30, 2013 1:43 PM PDT

You may have heard that after receiving mountains of criticism for its 21-page first draft, HHS released a new, streamlined application form for Obamacare today. So, hooray, right? Sort of. Here's my take on the original form:

In fairness, there's a single 2-page section you have to fill out, and then there are five more 2-page sections for other members of your family. So sure, it might be long if you have a big family, but a lot of it is repetition. And if you're just a single earner? Then aside from instructions, there's really only about four pages (five if you're an American Indian or Alaska Native): one page of basic contact information, two pages of income information, and one page of current insurance information.

And here is Ezra Klein's description of the new form:

Where the draft form was a hefty 21 pages, the new form is a svelte 5 pages....The new form is short because it's only for a single adult. But if you head to the HHS Web site, you can find the new form for family coverage. It, too, is shorter: A mere 12 pages rather than 21. But it only includes the forms for two people. If your family includes more than two people, the form advises you to "make a copy of Step 2: Person 2 (pages 4 and 5) and complete."

The result is that the new form for a family of six is 20 pages long and includes a substantial amount of time spent in front of a copier.

In other words, the new form is actually about the same as the old form. The fact that it seems shorter is merely an example of the power of framing. The default for the old form was 21 pages, which could be reduced to four if you were a single earner. The default for the new form is five pages, which can be expanded to 20 if you have a big family. Which one sounds better?

More Than Likely, President Obama Isn't an Idiot

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| Tue Apr. 30, 2013 11:30 AM PDT

President Obama said today that he believes there are some Republicans in Congress who'd like to compromise with him to enact "common sense" solutions to America's problems:

But they're worried about their politics. It's tough. Their base thinks that compromise with me is somehow a betrayal. They're worried about primaries. And I understand all that. And we're going to try to do everything we can to create a permission structure for them to be able to do what's going to be best for the country. But it's going to take some time.

Ed Kilgore isn't impressed:

Good luck with that, Mr. President. I suppose "permission structure" means assembling enough conservative support, and/or framing legislation so that it addresses the concerns of "the base" (e.g., border enforcement on immigration) in a way that makes bipartisanship possible. But as we saw in the supreme example of the Affordable Care Act, even adopting conservative policy prescriptions right out of the Heritage Foundation playbook, as implemented by the man who would become the next GOP presidential nomination, didn't prevent them from being demonized as representing the imposition of an alien "European-style" "government takeover of health care" aimed at totalitarianism and the slaughter of old people.

I'm sympathetic, because I agree. I don't think that Republicans have declined to make a budget deal because Obama didn't schmooze them enough, or because they didn't understand what he was offering, or because Democrats haven't framed their compromise proposals quite right. Republicans have declined to make a deal because they don't like any of the deals Obama is willing to make. Full stop.

Unfortunately, I think Ed falls into the same trap when he suggests that Obama's dinners with senators have gone quite far enough, thankyouverymuch. Instead, he says, "I'd recommend about four straight speeches about filibuster reform, followed by four straight speeches on what the sabotaging of the Affordable Care Act will actually mean for actual people. At a minimum, a Plan B to deploy if his umpteenth effort at bipartisanship fails is in order."

The problem is that this almost certainly won't work either. Obama made a full-court speechifying press on gun legislation, for example, and it had no effect at all. It wasn't enough to pass even the watered-down Manchin-Toomey amendment, a bill that threw in so many goodies for gun owners that it might actually have been a net negative for gun control.

All of which gets us to the guts of the problem: most likely, nothing is going to work. But if you're the president, you can't say that. You can't even act like it. You have to go out day after day after day insisting that progress is possible and deals can be made. This gets you lots of flak from fellow lefties who think it displays terminal naiveté, but what choice do you have? Obama pretty obviously understands everything that his lefty critics understand—he's not an idiot, and this is hardly rocket science, after all—but he also understands one other thing: he can't admit it. I imagine it's frustrating as hell. But like it or not, presidents have to keep their chin up in public and keep trying to make things happen, even if they know perfectly well that success is unlikely. Welcome to hell.

Renewable Energy is Merely Another Front in the Culture Wars Now

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| Tue Apr. 30, 2013 9:55 AM PDT

Over at ClimateProgress, Ryan Koronowski reports on a study that showed liberals and conservatives were about equally likely to buy an energy efficient CFL light bulb if it cost the same as an old-school bulb:

But slap a message on the CFL’s packaging that says “Protect the Environment,” and “we saw a significant drop-off in more politically moderates and conservatives choosing that option,” said study author Dena Gromet, a researcher at the University of Pennsylvania’s Wharton School of Business.

This reminded me of a line in a Jonah Goldberg op-ed this morning about our "infectious pessimism":

The obsession with "peak oil" and the need to embrace "renewables" because we're running out of fossil fuels are other symptoms of our malaise. Fracking and other breakthroughs demonstrate that, at least so far, whatever energy scarcity we've had has been imposed by policy, not nature....Humans are better understood as creators who've consistently solved the problems of scarcity by inventing or discovering new paths to abundance. As the late anti-Malthusian hero Julian Simon said, human imagination is the ultimate resource.

On the right, both climate change and questions about global limits on oil production have exited the realm of empirical debate and become full-blown fronts in the culture wars. You're required to mock them regardless of whether it makes any sense. And it's weird as hell. I mean, why would you disparage development of renewable energy? If humans are the ultimate creators, why not create innovative new sources of renewable energy instead of digging up every last fluid ounce of oil on the planet?

After all, there are plenty of reasons to think this is a great idea. If you're Bill Kristol, you want to do it to reduce the world's dependence on thuggish Middle Eastern dictatorships. If you live in Los Angeles (or Beijing), you want to do it to reduce smog. If you're Al Gore, you want to do it to reduce global warming. If you're James Hamilton, you want to do it because it will produce a more stable economy that doesn't bounce in and out of recession every time oil prices spike.

In other words, there are tons of good reasons to believe that we should be moving at warp speed to develop new sources of energy. You don't even need to believe in peak oil if you don't want to—though why you'd deny something so obvious is a mystery. Peak oil, after all, is only a question of when, not if.

I happen to agree that human ingenuity is, if not limitless, pretty damn close. So why not harness that ingenuity? Digging up ever more oil from ever more difficult and dangerous places is the sign of a plodding mind, not an ingenious one. If you truly believe in pushing the boundaries of human invention and creativity, you should be the world's biggest fan of renewable energy. That's our future.

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Chart of the Day: European Unemployment Hits New Record

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| Tue Apr. 30, 2013 9:13 AM PDT

Eurostat announced today that unemployment in the euro area reached a record 12.1 percent in April. That's not spread evenly, of course: unemployment was a mere 5.4 percent in Germany and a whopping 27 percent in Spain and Greece. Nor was it spread evenly across generations. Youth unemployment reached a staggering 24 percent overall, and was over 50 percent in Greece and Spain.

Let me repeat that: in Greece and Spain, more than half of those under age 25 didn't have jobs. This is pretty plainly a recipe for disaster.

In other news, Eurostat also announced that inflation in the euro area had dropped from 2.6 percent a year ago to 1.2 percent in April. So I guess austerity is working. It sure has kept inflation from spiraling out of control, anyway.

Democrats Are Starting to Sour on Obamacare

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| Tue Apr. 30, 2013 8:05 AM PDT

The Kaiser Health Tracking Poll is always interesting because they ask questions that nobody else does. This month, for example, they ask whether you've mostly been hearing good things or bad things about Obamacare, and far more people say they've been hearing bad things than good.

Aha! It's Fox News at work! But no. If you go to the next question, you find that Republican views of Obamacare have stayed pretty stable: most of them hate it, but they've hated it from the start. It's Democrats who are slowly but steadily souring on the law. Three years ago, around 70 percent had a favorable view of Obamacare. Today that's dropped to under 60 percent.

Why? Hard to say, since there are no questions that delve into that. Nor is there any clue about how this breaks down between middle class workers, who are mostly unaffected by Obamacare, and low-income workers, who are. Stay tuned to see if this turns around over the next 12 months, as Obamacare starts to roll out in earnest and informational campaigns start to swing into high gear.

We Are All Free Traders Now

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| Mon Apr. 29, 2013 10:28 PM PDT

Paul Krugman wonders why the Great Recession hasn't set off a round of tit-for-tat protectionism:

Why aren’t politicians — even conservative politicians — looking at the situation and saying, hmm, a tariff won’t increase the deficit, it won’t involve debasing the currency, but it could clearly help create jobs?

One answer might be the “Smoot-Hawley caused the Depression” thing; this isn’t true at all, but it might be serving the purpose of a noble lie.

Or maybe it’s the structure of trade agreements. The countries that arguably could really, really use some protection right now are inside the European Union, so no go. Countries outside still know that any protection they impose will lead to big problems at the WTO; the United States has to know that a protectionist response would break up the whole world trading system we’ve spent almost 80 years building.

So here’s a thought: maybe the secret of our protectionist non-surge isn’t macroeconomics; it’s institutions.

I agree that institutions play a role here. Inertia is a powerful thing, and there's not much question that free-ish trade is now a well-established status quo in most of the world.

I don't think that really explains things, though. If it were truly just institutional inertia at work here, you'd expect to see lots of politicians calling for protectionism but not getting anywhere. The demagogues would do their demogoguing, but fealty to the status quo would be too powerful for them to have any impact.

But that really isn't what we've seen. Generally speaking, we've barely seen anyone even advocating protectionist measures. It hasn't been complete silence, but it's been pretty close. In the U.S., in particular, the worst you can say is that the forward movement toward signing more trade agreements might have slowed slightly. But enthusiasm for those trade agreements hasn't really ebbed at all.

No, the answer is simpler: the trade economists have won. They've spent decades beating into us that free trade is a net positive for everyone, and by now we're all convinced. In fact, we're so convinced that it barely even occurred to anyone to respond to the Great Recession by calling for us to close our borders. In the world of ideas, this has been one of the 20th century's most complete victories.

I'd also call attention to a point made by Tyler Cowen: over the past two decades, virtually all of the job growth in America has been in the non-tradeable sector. Because of this, the political power of the manufacturing/mining/agriculture industries has been shrinking steadily.

Put these three things together—genuine belief in trade, the declining political influence of the tradeable sector, and the sheer institutional difficulty of limiting trade—and it's no surprise at all that protectionism has had only a minuscule resurgence over the past few years. It's a battle that's largely over and done with.

A Quick Survey on Abortion

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| Mon Apr. 29, 2013 12:00 PM PDT

Ed Kilgore has an alternate-world scenario for you to consider:

Suppose it were possible to engineer a permanent national deal (it's not, but just consider it as a thought experiment) wherein in exchange for a strictly enforced ban on post-viability abortions that didn't involve direct threats to the life of the mother, we'd also start treating all forms of contraception and pre-viability abortions not only as legal, but as medical procedures that would be publicly funded just like other medical procedures, under normal (not prohibitive) inspection and regulatory regimes? I suspect a large number of pro-choice folk would go for that kind of deal, which isn't that different from the situation in much of Europe. It would reflect the fact that most late-term abortions happen not because some bad girl has had sex and now finds motherhood inconvenient, but because she hasn't had meaningful access to contraception, Plan B, or early-term abortions.

As Kilgore points out, no one on the pro-life side would ever agree to this, so it's strictly a hypothetical. But I'm curious. How many on the pro-choice side would agree to a deal like this? Basically, the deal is (a) abortions up to, say, 22 weeks or so, would be legal and easily available, (b) late-term abortions would be completely illegal unless the life of the mother were clearly and directly threatened, and (c) this put an end to the whole issue. Everyone agrees to accept this as the status quo going forward.

Obviously this is pie in the sky. But I'm still curious. If it were on the table, how many of my readers would agree to it?