November 1, 2003
Fortney Pete Stark
Thirteenth District California
Congress of the United States
House of Representatives
Washington, D.C. 20515
Dear Mr. Stark:
Before the meltdown in NASDAQ, before the scandals at Enron and World Com, and before the scandals in the mutual fund business, I wrote you pointing out some of these problems. I asked you to change the law and force employers to give their employees the right to maintain their own portfolios in their 401k and 403b programs if they wanted to. I wrote my employer as well.
I backed my request with facts: NASDAQ was severely overvalued based on historic price to earnings and price to revenue ratios, and based on historic book values. Mutual fund managers were the biggest buyers of these overvalued stocks and were clearly not using sound investment practices (this continues today). Even if you were a manager of a tech fund, there was no reason to have EBAY or Yahoo with a price to revenue ratio of over 20 in it. That mutual fund managers, outside of rhetoric, showed no concerned for CEOs paying themselves billions of dollars even when their performance based on stock price appreciation was lousy (this continues today). And that analysts were recommending stocks that were clearly overvalued, and that the reason these analysts were doing it was because the companies they worked for had investment banking relationships with the companies they were recommending. Mutual fund managers were listening to these recommendations, I know they were listening because they were buying the stocks.
I felt based on these facts that an American should have the right to invest their own retirement money the way they felt was best for themselves and America. For example, I feel pay for performance is what America is about, America is not about paying yourself huge bonuses and stock options when your performance is lousy. Owning a portfolio of tech stocks is about owning good quality companies with earnings, it is not about gambling that a company is going to be the next Microsoft, which is exactly what anybody is doing if they are buying stocks that have price to revenues of over 15.
I am hoping that you have changed your mind now that you have witnessed what this irresponsibility can cost middle-class Americans. I have enclosed a couple of articles that point out more problems within the mutual fund business. These articles are ubiquitous now so you should have no problem reading more on the corruption in the mutual fund business if you're interested or you want to verify my findings. Contrary to what you want to believe, this is not an isolated incident, this is not the exception, but is the norm now: the mutual fund business as a whole has severe regulatory problems that the SEC is obviously not able to handle. Middle-class Americans have lost billions of dollars due to corruption that they will never recover.
No, I do not think that everyone should be forced to setup his or her own portfolios. But, I do feel that someone who wants to should be able to, this is America.
I would also like to remind you that when I was 17 and joined the Armed Forces, the Federal government told me indirectly that I was too irresponsible to run my own retirement fund, and told me directly that they would do it for me and they started pulling out money from my check for Social Security. Before I was 30 they raised my full retirement age by almost 2 years. They did not think that me being in the workforce for 48 years was enough and wanted another 2 years (unlike a congressperson who earns a retirement after only 2 years of service). I am still 20 years away from full retirement and there is no telling how much more they are going to increase my retirement age. I also now pay close to $6,000 a year in Social Security taxes alone (my employer pays an equal amount in my name).
As far as me collecting any Social Security, the facts say that will not happen. You and your colleagues have amassed $6.8 trillion in debt and you only keep spending (the $2.2 trillion of the so-called Social Security trust fund is in government bonds, meaning it is money that the government owes itself). To show you this has nothing to do with Democrats vs. Republicans, I go to the Treasury Department's own web site and look at the historic Public Debt: in 1980 it was $1 trillion, in 1988 it was $2.5 trillion, in 1992 it was $4 trillion, in 2000 it was $5.7 trillion, and now in 2003 it is $6.8 trillion. You politicians, left, middle, right, Democrat, Independent, Republican, the facts say you all like to spend, spend, and spend more.
Keynesian Economics said that the government should save during booms and increase spending during a recession, that way the severe swings in the economy such as those that occurred in the late 20s and 30s, and until the end of WWII, would be dampened. Clearly, the government has not done that. What they have done is to borrow and spend when there is a recession and borrow and spend more when there is a boom.
In 6 years the boomers start to retire and in 11 years all those Social Security surpluses run out. It is mathematically impossible for me to collect any Social Security. There will be means testing, and anybody who has been somewhat responsible and saved will get nothing. Today, the VA tells me that I must make the co-payments because I am a responsible citizen who put myself through college when working full-time, got a job and saved, whereas, if I was irresponsible and was broke, the government would make the co-payments for me.
The government has wasted all the Social Security taxes I have been paying for the last 30 years. Fine, but please allow me to invest what little I have left in sound companies and not the junk that mutual fund companies invest in. Not to mention the hidden costs that I can avoid by maintaining my own portfolio such as money for the mutual fund companies to lobby Washington, money for the commercials that promote mutual funds, and money for bonuses paid to executives and fund managers (this money comes right out of the fees that are charged to shareholders of mutual funds, it does not grow in the backyards of mutual fund companies). I say a little (the money I have left over) because I pay 28% to the Fed, then 9.3% to the State, I pay an 8.25% sales tax, property taxes, airport taxes, the FCC charges tax on my phone, the SEC charges a tax when I sell a security, I pay excise taxes on my gas and tires. Please Mr. Stark, I am taxed to death, please allow me to invest what little I have left in sound companies without paying all the hidden costs I do with a mutual fund.
I am surprised that Stanford is not more worried. Clearly there are problems in the mutual fund business, forcing employees to invest their money (the TDA program at Stanford is a program where an employee invest their own money, not Stanford's), into a mutual fund even though there is a ton of reports showing Stanford that mutual fund companies don't always do what is in the best interest of shareholders, could be risky.
I say forcing, because as a responsible citizen I must use every tax deferred plan I can to save for my retirement. The TDA is the only one offered by my employer that offers tax deferral and allows me to invest enough to make a difference when I retire. Yes, I have the choice not to participate in the TDA program, but that would not be good for America or myself. America already has plenty of people who don't save.
Stanford no longer offers defined benefit plans to new hires, but offers a defined contributory plan: Stanford does not want to be in the retirement business, they know all too well that there is going to be severe problems with retirement and the Boomers. I would think they would want to be completely out of the business, not allowing employees to make their own stock selections and making employees pay indirect fees for lobbying Washington, paying for mutual fund commercial advertisements, and paying executive and fund manager bonuses might open them up to future lawsuits? Granted, no one is worried about it now, but just wait until the $6.8 trillion in National Debt and the 70 million Boomer retirees meet head-on.
One final question. For the past couple of years mutual fund managers, and brokers have complained that they were only doing what their clients and customers told them to do, e.g., a mutual fund manager who ran a tech sector mutual fund was buying tech stocks just like their clients (shareholders) were telling them to (Fidelity Select Technology had a NAV of around $200 in 2000, now it is in the mid-fifties, almost a 75% loss). The fact that NASDAQ lost 75% of its value from 2000-2002 was not their fault. Even though they were all paying themselves billions of dollars in bonuses from 1995-2000 when the stock market was going up.
This year it looks like the stock markets are going to have a good year, and NASDAQ may be up 40-50%. Do you think that these brokers and fund managers should be able to legally turn right around and take credit again for the good performance in general with mutual funds? And pay themselves millions in bonuses or do you think the clients, customers, and shareholders should get the bonuses since they are the ones who told the financial services companies what to buy?
If you agree that when markets are going up or down that it is the clients, customers, and shareholders responsibility, you need to pass a law that says brokers and mutual fund companies cannot pay themselves bonuses when the markets are up and blame clients, customers, and shareholders when the markets go down.
If you agree that when markets are going up that brokers and mutual fund managers can pay themselves bonuses, then you need to pass a law that says, when the markets start to fall the brokers and managers have to give the bonuses back unless of course, the managers figure out a way to not follow the market, in that case, it would be perfectly okay for the brokers and managers to pay themselves another bonus.
But, letting the brokers and fund managers pay themselves huge bonuses when the markets are going up and then blame their clients, customers, and shareholders when the market go down is ridiculous and not very American.
As far as saying I have a choice as to using or not using these unfair professionals, that is obviously not the case, my employer forces me to invest via a mutual fund when I save through its TDA program.
Sincerely,