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Public pensions funds are OK
Pensions file
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TEXT OF STORY
Bill Radke: I've been receiving my quarterly financial statements in the mail recently -- which has just been great, because that shredded paper increases the carbon content in my compost bin.
Now not all of those quarterly statements are too scary to read. The National Council on Teacher Retirement holds its annual convention this week, and trustees will actually be getting a reassuring report about their pension funds. Danielle Karson has that.
Danielle Karson: Despite the gyrations in the stock market, public pension funds have remained fairly insulated from the ups and downs.
Keith Brainard, with the National Association of State Retirement Administrators, offers one reason:
Keith Brainard: Public pension funds are very long-term investors. They have the ability to ride out market volatility like we're seeing right now.
Public pension funds total more than $2.5 trillion. Brainard plans to tell the convention trustees that their money is secure because it's diversified in bonds, real estate and stock.
Brainard: They don't have all their eggs in one basket. The hit on these funds is not nearly as bad as it would be had their assets not been as diversified as they are.
But the picture isn't nearly as rosy for people with private retirement plans, because those are heavily invested in stocks. Pension plans lost as much as $2 trillion this past year, most of which were in IRA's and 401(k) accounts.
In Washington, I'm Danielle Karson for Marketplace
Making 401(k)s And IRAs More Like Pension Plans
Who's confiscating your 401(k) and IRA? Dateline Raleigh, NC, November 6, 2008: Democratic leaders in the U.S. House of Representatives discuss confiscating our 401(k)s and IRAs, by Carolina Journal Online reporter Karen McMahan.
This shocking pronouncement is certainly an attention grabber, which if even partially true, would have an impact on nearly every employed and retired American. The basis for the report is testimony before the House Committee on Education and Labor in early October.
Dr. Teresa Ghilarducci is one of many witnesses (scholars, retirees, activists, an investment mogul, and benefits experts) who were interviewed by the committee members. (I was skipped over once again, but a receptive person in the HCEL was willing to forward a listing of my articles to the right person. I expect an invitation to testify momentarily)
McMahan writes: "Dr. Ghilarducci, professor of economic policy analysis at the New School for Social Research, drew the most attention and criticism. She proposed that the government eliminate tax breaks for 401(k) and similar retirement accounts, such as IRAs, and confiscate workers' retirement plan accounts and convert them to universal Guaranteed Retirement Accounts (GRAs) managed by the Social Security Administration."
Several people have asked me to comment on the probability of such a radical approach ever getting any support, much less actually being implemented. Most feel that even the most socialistic of legislators would give the doctor's ideas a quick thumbs down. I agree that they should, but part of the concept, tuned up "capitalistically", could be precisely what this investment doctor would order.
Years ago, a not-quite-as-sophisticated-as-the-internet rumor mill spread a story that the Feds were scouring the countryside, knocking on doors, and confiscating $100 bills. The purpose of the venture was to put an end to the income-tax-dodging underground economy of the 80's. Babysitters panicked, restaurateurs iced their C-notes in freezers, and self-employed franchisees plotted Caponesque money laundering schemes.
Nothing happened then that a 10% (or lower) Federal sales tax (coupled with seriously lower income taxes at all levels) wouldn't cure today. So as scary as a 401(k) or IRA confiscation plan would be now, the panic will likely fade quietly away, just like the $100 bill outrage of the 80's. The underground tax dodging continues, and at a magnitude that dwarfs any temporary tax relief that is afforded today's self-directed savings plans.
One would think that, as a society, we would be capable of pouncing upon opportunities for brilliant solutions to problems of fairness like these. We just can't seem to get out of our own political way. The fix to the retirement investment account fiasco is only slightly more complex than the incredibly easy solution to Social Security.
Dr. Ghilarducci has presented a socialist solution to a problem that could easily be dealt with using rudimentary controls that would limit the amount of risk allowed inside these tax deferred savings devices. She also ignores the fact that most self-directed money lies in voluntary, privately sponsored, employee benefit programs--- emphasis on voluntary and private.
Self-directed retirement accounts could be controlled as to content and asset allocation to: 1) assure that a reasonable proportion of all accounts are guaranteed as to principal and interest, and 2) preclude ownership of high-risk securities.
I'm not sure that the good doctor grasps the distinction between a self-directed, defined-contribution, investment plan and a guaranteed, defined-benefit, pension plan. Most plan participants are led to believe that the former is just as secure as the latter. Sorry, Charlie.
The problems are to control the speculative enthusiasm of the unqualified self-directors, and to create a way for captive beneficiaries of the phantom Social Security trust fund to augment their guaranteed retirement benefits.
A few simple standards would create a whole new set of conservatively managed "retirement plan only" mutual funds, with reduced management fees--- in deference to their captive audience and less speculative composition. Plan participants would not be able to speculate with their savings as they are today.
Some form of oversight would be needed to assure that no raw speculation was allowed into the new breed of standard mutual funds and CEFs. Instead, Dr. Ghilarducci visualizes all your no-longer-self-directed money finding a new home in the Social Security Administration's toy chest--- thus transforming a behemoth bureaucracy into an investment management giant! This is just too alarming for words---
But, what if, instead of a Guaranteed Retirement Account, we adopted a whole new system based on the SSRIA? (Google it.) No, it doesn't exist yet, but the private sector could certainly provide it in a commission free, guaranteed income only contract, tomorrow.
The SSA could oversee the providors, who collectively have thousands of years' experience, and thousands of investment professionals capable of managing guaranteed income vehicles. Just think about it. All employees could opt out of Social Security, and make a smaller, mandated contribution to their one SSRIA.
Employers could include the SSRIA as an option for both self-directed and matching contributions. Only SIBORAP Tier One securities would be acceptable investments. Existing Social Security balances could be frozen or directed to the personal SSRIAs.
This approach, admittedly far too simple for consideration, would create thousands of new jobs, eliminate the Social Security funding mess, add billions to personal disposable incomes, and with supervision, allow employers to cut prices, increase salaries and dividends, and create jobs.
Some would say that this approach can't work with our broken system, as evidenced by the legions of Wall Street fat cats who encourage the creation of toxic products and who routinely pilfer shareholder treasuries for ludicrous sums. Shareholders should solve that problem, not the government--- but the government could help if they chose to.
Pure capitalism disappeared years ago, traded in for a less efficient, but fairer, regulated version. It's the regulators and their overseers that failed, leading us multi-derivative miles from the pure simplicity of stocks and bonds.
Steve Selengut
http://www.sancoservices.com/
http://www.kiawahgolfinvestmentseminars.com
Professional Investment Management from 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"
I am the Executive Director of a public pension plan who posted below. Obviously, posting in from Word caused some translation problems with the text.
My punch line was this: what the teachers will see in their third quarter report will look "fairly bad."
Let's be honest in our disclosures to the public.
As a governmental retirement plan executive director, I prefer to remain anonymous. I have always admired your program, but after reading your report, I have to ask – how did this story get past your editors? It does not belong on your program.
I agree with some of the comments posted here. 401ks and IRAs are not pensions. I also disagree with some of Mr. Brainard’s comments. It’s true that most public (and corporate) pension plans have access to nontraditional asset classes that the 401k and small investor can’t access, but other than cash and REITs (pretty traditional stuff), there aren’t many bright spots this year. Alternative assets, taken as a group, might be down less that the S&P 500 Index, but I have seen some pretty big hits in a wide variety of alternatives this year. I have personally seen a 20% decline thru 9/30/08 on an alternative international asset class, which is better than the 32% negative benchmark, but let’s not sugarcoat this. Relatively speaking, we did well, but the hit is big. Why not just say that? We lost money, but did a good job of protecting the downside risk. That’s the story, but you completely missed it.
The reporter on this story is off base by stating “public pension funds have remained fairly insulated from the ups and downs.†Fairly insulated? Not really. Come mid-November, when the teacher trustees see their third quarter report, they, along with other trustees, will see some incredibly large losses. True, it could have been worse, but what they will see in their reports is going to look “fairly bad.â€
ERISA - Employee Retirement Income Security Act of 1974 holds Trustees personally liable. While it is true that most employees make the investment choices in 401k plans, the Trustees select the allowable vehicles and are responsible for those choices. If these "toxic assets" have found there way into the retirement plans (which they have and overwhelmingly so), then the Trustees who allowed these investments will be held personally liable. This will the 2009 feeding frenzy for lawyers. Participants should be making inquiries in writing; and abuses should be reported to the DOL. The fallout will lead to a lack of protection by the FDIC among those trusteed by banks. And, like ENRON, the failure of retirement plan auditors will be exposed (a false sense of security enacted in 1974).
The predators of WallStreet have pedaled their $57 tn sub-prime mortgage and commercial loan securities in every sector world-wide. The larger the plan, the greater the chance it has fell prey to these predators. And, with respect to governmental pensions, with most being trusteed by financial institutions are the most vulnerable. And, like a previous writer said, we the taxpayer will pay for the deficiency in funding status that arises from these unrecoverable losses.
Marketplace editors:
I just about about drove off the road this morning listening to this story.
Seriously, do you people really believe for a moment that public pension funds are more immune from what has transpired because of their "long term perspective" and supposed superior asset allocation strategy?
Rest assured, they have gotten absolutely hammered like everyone else and stories will soon begin to emerge of problems being compounded due to hedge fund and related alternative investment collapses in the permanent chase for their required 8% or so rate of return.
Their ability to "ride out volatility" is not a function of their asset allocation but a function of the state and local taxpayer being required to back up the inevitable contribution deficiencies which are materializing as I write this.
Please, in the future, cast a more jaundiced eye at claims like this and do a modicum of research before swallowing the bait in its entirety.
Mark Haveman
Executive Director
Minnesota Taxpayers Association
