Bush plan holds promise for Wall St.

President Bush's plan to create private investment accounts to augment Social Security would initially benefit a few large players in the money management industry, such as Boston's State Street Corp. But down the road, the sheer sum of money flowing into these accounts could become a boon for other firms, industry officials and analysts said yesterday.

Thus far, Wall Street has been supportive of the concept of private investment accounts, which would bring millions of new customers into the investing business, but has kept a low profile in the debate because of its political sensitivity and lack of specifics.

The president is proposing to allow Americans under age 55 to invest a small portion of their payroll taxes into index funds, which are popular because of their extraordinary low costs and simplicity. The president would also let workers invest in a government securities fund and a so-called lifestyle fund, which becomes more conservative as workers near retirement.

Unlike actively managed funds, where professionals choose the investments, index funds automatically adjust their holdings to mimic major market indexes such as the Standard & Poor's 500.

Because the profit margins on index funds are so thin, companies have to accrue massive pools of assets -- billions and billions of dollars -- to make much money.

Bush's proposal would direct ''a modest amount of low-margin business to the low-margin players," said Robert Pozen, the chairman of MFS Investment Management in Boston. Pozen served on Bush's Commission to Strengthen Social Security and is a longtime expert on Social Security.

''Ninety-nine percent of all money managers aren't going to be involved in this program," he said, which ''clears away all the garbage" that it would be a big pay day.

Just a few companies dominate indexing, including State Street, Mellon Financial Corp., and to a much lesser extent Fidelity Investments. State Street and Fidelity declined to comment.

The largest index manager in the world is Barclays Global Investors, which also runs the four index funds in the Thrift Savings Plan, the retirement account for federal employees that Bush has cited as a model for the private Social Security investment accounts.

''We price our business so that it's profitable," said Barclays spokesman Tom Taggart. He said it would be a gamble for inexperienced firms to compete for the government business. ''You can spend the money to build the operation, but you've got to get those assets in pretty quickly to make it pay off."

At Mellon Financial, which has about $80 billion in index accounts, vice president Ron O'Hanley sounded unenthusiastic about the business. ''It's not where we're focusing our growth effort," in part because of the low fees, and because Mellon has ''investment processes that are more important to emphasize to our clients."

The White House predicts annual expenses for its plan at 0.30 percent, or $3 for every $1,000, most of which will go toward recordkeeping and other paperwork duties handled by the federal government, and only a small portion going to money managers.

That 0.30 percent total expense is more than what other index accounts cost: Fidelity charges just 0.10 percent for some of its index funds, and the Vanguard Group's prices start at 0.18 percent. But analysts said the higher costs are probably attributable to the greater amount of work necessary to administer low-dollar accounts for millions of far-flung Social Security investors.

Industry officials estimate that under the Bush plan money managers would be paid 0.05 to 0.10 percent, or 50 cents to $1 for every $1,000 under management -- higher than the money management fees that index providers currently charge their largest accounts. Barclays, for example, receives a ''fraction" of the 5 to 6 cents in total administrative costs that the Thrift Savings Plan incurs each year, Taggart said.

Pozen estimates that if two-thirds of eligible Americans take advantage of the Bush plan, it would funnel around $65 billion a year at the outset into the stock and bond markets, not an outrageous sum in today's global financial markets where mutual fund assets alone are $8 trillion.

But over time the Social Security investment accounts could accrue into trillions of dollars overall, reaching the kind of scale that could make it a worthwhile business for other companies willing to bear the prodigious upfront costs of technological systems necessary to run large index accounts.

''If the type of money they're talking about trickles into this industry, you'll get a lot of" companies competing, said Tony Evangelista, who heads PricewaterhouseCoopers' investment management regulatory compliance practice. ''People will develop the capacity, they'll develop the skill set" to run index funds, he added.

One wild card is how much handholding and education millions of first-time investors will require, a critical component if they're to properly save for retirement, said Gordon Forrester, marketing chief at Putnam Investment's retail arm.

Another unknown involves Bush's call for workers to use a portion of their invested savings to buy an annuity, which generally carries slightly higher fees, to help provide enough guaranteed income to keep them above the poverty line through retirement.

''Without question the [small] size of the accounts, and the potential limit on the fees that could be charged are significant issues we're evaluating," said Ken Cohen, senior vice president for Mass Mutual Financial Group in Springfield, one of the nation's largest annuity providers.

Andrew Caffrey can be reached at caffrey@globe.com.