Murphy’s “Secure Choice Savings Program” is his attempt to raid private savings and amass a large stockpile of money from which his Wall Street buddies can pilfer hundreds of millions of dollars in exorbitant management fees every year.
Ronald Reagan once said that “the nine most terrifying words in the English language are ‘I’m from the government, and I’m here to help.’” New Jersey’s residents should be especially terrified because their government now proposes to help solve a problem that does not even exist.
Governor Phil Murphy, the most recent Goldman Sachs import to occupy New Jersey’s governor’s mansion (since the last one was such a success), has determined it problematic that “more than half of the private-sector employees in New Jersey work for employers who do not offer retirement plans.”
And so what? Anyone who wants a retirement account can have one simply by visiting any brokerage firm website – Charles Schwab, TD Ameritrade, Fidelity, etcetera – and opening an IRA. This can be accomplished in minutes. They can also open a brokerage account to save money beyond the IRA limits. There is no lack of access to retirement accounts.
No matter. There is money to be had, and Murphy will have it, thank you.
The solution he proposes, entitled the “Secure Choice Savings Program,” is to separate his subjects from their money by creating a new state-run retirement program for private sector workers, because, you know, the public sector retirement system, which is $150 billion in debt, is doing so well. Under this new program, employers with twenty-five or more employees would be forced (you know it’s a great idea when you have to force it on people) to automatically enroll their workers in the state program, with the employee’s money being taken directly out of their paychecks. Employees could opt out of the program if they choose, but the idea is that by automatically enrolling people, many are likely to stay. Smaller businesses would be encouraged to do the same for their employees, who could opt into the program, though why small businesses would go out of their way to go through the headache of this is unclear, especially when they can just create such a program through private means if they so desired.
We have advocated before for a small opt-out program as a supplement to Social Security savings, wherein workers would automatically see $500 of their federal tax refund diverted to an IRA unless they chose to opt out, with the government making a matching contribution. Should the taxpayer participate every year, that account, forty-five years later, would have nearly $1 million, assuming market growth consistent with what we have experienced for the past half century.
But the plan we proposed called for the money to be put in a passively managed fund with miniscule management fees, that merely tracks the S&P 500. Murphy’s plan requires all investment money be placed into funds actively managed by his friends on Wall Street, and to pay them exorbitant fees to do so.
More specifically, the Wall Street managers hired to manage the funds in Murphy’s program would be allowed to charge fees of up to .6% of the assets under management, minus administrative costs. While that may not sound like a lot, it’s twenty times greater than the .03% fees charged by Charles Schwab’s passively managed S&P 500 fund (ticker: SCHX), which anyone can invest in, and which doesn’t require much management because it just mimics the S&P index. So, for every $10 billion under management in New Jersey, Murphy’s friends would receive $60 million every year (!), and would probably underperform passive funds that would only cost $3 million.
This is the real goal of this program: to create giant pile of wealth from which Gov. Murphy’s former colleagues on Wall Street can pay themselves oodles of money!
As it is, New Jersey’s public sector pensions presently have $80 billion under management, and pay over $700 million annually in fees – well, more accurately, $400 million in fees, and $324.4 million in bonuses! — for a program that’s basically insolvent. Those pensions cover about 800,000 active and retired employees. Murphy’s new private sector plan targets all 1.8 million private sector employees. If the private workers fund reaches the same $80 billion under management, the annual kickback to Wall Street fund managers would be an additional $480 million!
What’s worse is that these active fund managers rarely outperform the market. For the 15-year period ending in March, 2018, over 90% of actively managed funds failed to beat the S&P 500! In other words, any average person who just bought into Schwab’s S&P 500 fund, and let the money just sit there, would have had a ninety percent chance of beating the professionals who pick stocks for a living! And yet, these fund managers were paid countless millions for their underperformance, which is also part of the problem: paying the managers eats into the returns of the funds and makes them less profitable.
It should surprise nobody, then, to learn that passive funds have become increasingly popular, and have taken a huge chunk of business away from the active fund managers. Today, passively managed funds comprise roughly 42% of all U.S. stock fund assets, up from just 24% in 2010, and a mere 12% in 2000. This is killing Wall Street profits!
And this is the real problem Murphy is trying to solve. This program has nothing to do with providing New Jerseyans with a better retirement, and everything to do with providing Murphy’s Wall Street friends with another a large client with a ton of money for them to manage.
Examining the fine print in Murphy’s plan does not instill more confidence. The program would be managed by a team of board members, all of whom would be political appointees: the State Treasurer, or his designee, who shall serve as chair; the State Comptroller, or his designee; the Director of the Office of Management and Budget, or the director’s designee; two public representatives with expertise in retirement savings plan administration or investment, or both, of which one is appointed by the Speaker of the General Assembly and one is appointed by the Senate President; a representative of participating employers, and a representative of enrollees, both of whom are appointed by the Governor.
These members are to serve without compensation, which makes one wonder why they would serve at all, unless their service is otherwise incentivized by the promise of kickbacks, either in the form of campaign contributions, or future employment, or otherwise.
These political appointees would then select which lucky few Wall Street fund managers would get to manage everyone’s money, and charge their ridiculous fees. And since we all know how this will work, the people chosen will all be powerful donors, or from firms that donate large sums on their behalf, to the board members and the politicians who appoint them, and/or their various political action committees that control such things.
Oh, but don’t worry. The law specifically requires that each “board member, prior to assuming office, shall take an oath that the member will diligently and honestly administer the affairs of the board.” So rest easy!
Further, the proposed law assures the public that investor money will be kept “separate and apart from all public moneys or funds of this State.” This is, after all, the “Secure Choice Savings Program,” so you know your money’s safe! It’s right in the title! But nothing stops the fund managers from investing the money in state, county, or municipal bonds, to fill the perpetual budget deficits run by politicians, (just as our Social Security trust fund is “invested” in Treasury debt, that then gets spent on the general budget), or in “loans” to the insolvent public sector pension fund (good luck seeing that money again!). In other words, these private retirement funds are at risk of becoming — or perhaps better put, “are likely to become” — the State’s piggy bank, which politicians could raid practically at will to buy more votes and influence for themselves, while kicking back even more money to their donors! And since politicians would be appointing the board members who hire the fund managers, the fund managers who would not play ball would find themselves replaced by those who would.
This is obviously a scam. Never let anyone manage your money whose first loyalty is to someone else.
If Governor Murphy is really concerned about retiring New Jerseyans (also known as “Floridians”), his program would direct that their retirement savings be deposited into privately held accounts which could be passively managed, or otherwise invested by the account holder in a method of their own choosing, and kept safely away from greedy politicians and Wall Street scam artists. But that’s not the goal here. The goal here is to separate hard-working New Jerseyans from their money, and make very wealthy New Yorkers a little bit richer in the process.
One of the most common Wall Street axioms is that to get rich in the stock market, it is best “to be greedy when others are fearful. And to be fearful when others are greedy.” Phil Murphy knows this well. New Jerseyans should be very fearful.
 Here’s the difference between active and passive funds: An actively managed fund has some Wall Street trader studying investments all day long and buying and selling them as he sees fit. This person needs to be paid. But a passively managed fund basically just mimics an entire index, like the S&P 500, or the NASDAQ, or the Dow Jones, or perhaps entire sectors, like energy, financials, tech, etcetera. So rather than picking individual stocks, any investor can just buy shares in one fund (these are called “electronically traded funds,” or “ETFs”) that itself contains all of the underlying stocks. You can invest in the entire S&P buy buying shares of Spider’s S&P 500 fund (SPY), for example, and it already has the 500 S&P stocks in it! Or you can invest in the entire NASDAQ with the PowerShares popular “QQQ” fund, or buy the entire stock market with the Vanguard Total Stock Market ETF (VTI). There are many others like these, and investing in them could not be easier. You just buy shares in those funds the same way you would buy shares in any stock, except instead of buying hundreds of individual stocks, you just buy the shares in a fund which already contains those stocks.
 These passively managed funds have become popular for three important reasons: 1) They’re extremely diversified, because they cover entire markets with one purchase; 2) They’re extraordinarily inexpensive, because all they do is track a pre-defined list of stocks, so you’re not paying a team of analysts to do research all day long to determine which stocks to buy and sell; and 3) they consistently beat funds actively managed by the Wall Street insiders.