Pension360

Fewer employers are offering auto-enrollment and auto-escalation for new employees, according to a study by the Society for Human Resource Management.

Why? The answer is simple: the potential cost of such policies.

From Bloomberg:

By sparing workers extra paperwork—and making the investment decisions they didn’t feel qualified to make—auto-enrollment could boost 401(k) participation rates as high as 95 percent. Auto-escalation could nudge workers to take full advantage of an employer’s match and save the 10 percent or more of salaries they generally need to retire comfortably.

Ten years later that momentum has completely stalled, and it turns out the big reason is cost. According to the latest survey by the Society for Human Resource Management of its HR professional members, fewer than 40 percent of employers offer auto-enrollment for new employees and almost 20 percent offer auto-escalation–numbers that actually fell slightly in the past few years. (This isn’t to be confused with reenrollment, in which employers automatically change the investment mix. Employers can also auto-enroll existing employees, something 21 percent do.)

What’s gone wrong? Retirement experts, including organizations that represent employers and 401(k) plan providers, still enthusiastically endorse automatic 401(k) features. The problem is that companies remain skeptical. The top reason, according to organizations that talk to these holdout employers, is concern about how expensive all this can be.

By getting more workers to increase contributions to their 401(k), you potentially raise the amount you’ll need to pitch in as a matching contribution. If you match the first 3 percent that workers put in, for example, and you get another fifth of your workforce to meet that threshold, then auto-enrollment can look like an expensive decision.

Industry experts, however, say that employers are overestimating this fear of rising costs. According to them, raising retirement contributions could, in fact, lower other company costs.

Massachusetts’ “T” Pension Fund — the retirement system for employees of the Massachusetts Bay Transportation Authority — has made headlines in recent years for its unprecedented secrecy and exemption to public records requests.

It’s a private trust, and doesn’t qualify for the same disclosure rules as public pension funds.

But it’s also been in the news for its management decisions and underfunding.

Speaking at a State House conference meeting on Wednesday, Massachusetts Governor Charlie Baker called for the state’s $60 billion public pension system for public employees and teachers to manage the Massachusetts Bay Transportation Authority’s pension system, because the former has lower costs and better oversight than the latter.

In an article posted by The Boston Globe:

In a wide-ranging speech Wednesday, marking one year since a fiscal control board took over the Massachusetts Bay Transportation Authority, Baker said the $1.5 billion fund was in a “free fall” that could threaten its ability to pay retirement benefits for 11,700 current and former transit workers.

“We believe the T’s pension system cannot survive as a standalone entity,” Baker said, noting that its assets had declined by $89 million in the past year alone.

The pension fund has come under intense scrutiny in recent years for failing to disclose losses in a fraudulent hedge fund and running its operation in secrecy, despite receiving tens of millions of dollars annually from taxpayers.

Baker said he will ask the Legislature next year to act so the MBTA fund can be managed by the $60 billion retirement system for the state’s public employees and teachers. The administration has said the state fund has lower costs and better oversight than the T fund.

[…]

He did not offer details on how the Legislature would go about allowing the T pension to be managed by the state fund, officially known as the Pension Reserves Investment Trust. He said the administration would be conducting a legal review of the process.

Gov. Baker last month signed a law that opened the “T” fund to public records requests. The fund’s director promptly resigned.

Another day, another lawsuit levied against a 401(k) plan. This time, self-dealing is on the investment menu.

A class-action lawsuit is being filed against New York Life for allegedly using a high-cost mutual fund in the company’s 401(k) plan. The mutual fund, which is operated by New York Life, is significantly more expensive than its peers.

According to an article on Investment News:

Current participants in two New York Life 401(k) plans filed a class-action lawsuit — Andrus et al v. New York Life Insurance Company et al — alleging self-dealing by the firm and other affiliated fiduciaries for retention of a MainStay-branded S&P 500 index mutual fund in two company retirement plans.

The MainStay brand of funds is owned and operated by New York Life and subsidiaries, and the entities “improperly and unjustly benefited from the excessive fees and expenses,” according to the complaint, filed July 18 in the U.S. District Court for the Southern District of New York.

“A prudent fiduciary managing the plans in a process that was not tainted by self-interest would have removed the MainStay S&P 500 Index Fund from the plans,” the complaint said.

Rather, by not investigating availability of lower-cost funds between 2010 and the present, plan fiduciaries breached their duties of loyalty and prudence under the Employee Retirement Income Security Act of 1974, plaintiffs allege.

The MainStay fund cost 35 basis points, whereas a similar mutual fund offered by Vanguard Group cost 2 bps and a collective investment trust fund offered by and State Street Global Advisors cost 4 bps, the complaint said.

Retaining the MainStay fund ultimately caused participants in the two 401(k) plans — the $2.5 billion Employee Progress-Sharing Plan and the $600 million Agents Progress-Sharing Plan — to overpay by nearly $3 million, plaintiffs claim.

A newly-filed lawsuit accuses a small 401(k) plan of offering excessively expensive, actively-managed investment options.

[Read the complaint here.]

The suit is against Checksmart Financial and its 401(k) plan, as well as its investment advisor Cetera Advisor Networks.

From Plan Sponsor:

The lawsuit accuses Checksmart; its plan committee, which only has one member; and the plan’s investment adviser, Cetera Advisor Networks, of only offering expensive and unsuitable actively managed mutual funds as investment options in the plan without an adequate or appropriate number of passively managed and less expensive mutual fund investment options. According to the complaint, most investment options have expense ratios of 88 to 111 bps, which the document says are four or more times greater than retail passively-managed funds—which were not made available to the plan and its participants during the class period. In addition, the average expense of all funds is 104 bps.

The complaint points out there are virtually no Vanguard index funds offered in the plan, and mentions that retail shares of the Vanguard S&P 500 Index Fund have an expense ratio of 16 basis points, while Admiral Shares (which requires a minimum $10,000 investment—an amount the plan would easily cover) has an expense ratio of 5 basis points.

The lawsuit specifically calls out the plan’s ‘Lifestyle Portfolios’—risk-based investment options that hold $13.25 million, or 52.63%, of the approximately $25 million in plan assets—saying not only are they the most expensive plan investments, but they materially underperformed the S&P 500 total return under every benchmark.

Beginning in 2017, millions more Japanese citizens will be able to set up private 401(k) plans. It’s estimated that nearly $10 billion will flow into the country’s private defined-contribution space over time.

From Reuters:

Starting next January, 27 million Japanese, including housewives and civil servants, will be newly eligible to set up private defined-contribution pension accounts. Currently, only the self-employed and workers who don’t have corporate-sponsored pension plans can set up private pension accounts.

It’s already proven something of a hit with the public. Since the law reform passed parliament in May, monthly web access to the 401k Educational Society, a non-profit that promotes defined-contribution pension plans, has surged seven-fold to 42,000, said Kayo Oe, the group’s chief researcher.

The change has the potential to attract as many as 9.4 million new users over time from 257,000 now, and generate an annual capital flow of up to 1 trillion yen ($9.46 billion) into the private-pension sector, according to Nomura Research Institute (NRI).

Many who wish to grow their plans do so by investing in both domestic and foreign stocks.

“How I see it is that the government won’t be able to pay that much in pensions anymore, so it’s telling us, ‘Go take care of it yourself. We can’t do it for you,'” a Japanese woman told Reuters.

Poland announced earlier this month a complete overhaul of its private pension industry, and markets subsequently fell to 5-month lows.

Now, officials are trying to quell investors’ fears about the overhaul as they move forward.

From Bloomberg:

Investors worry that the cash-strapped government will find meddling too tempting to resist. In the last overhaul, the government canceled the government bonds held by the pension funds — 51 percent of their assets at the time — to cut its debt load. Since the end of 2013, Warsaw’s main stock index has plummeted 43 percent in dollar terms, while emerging stocks dropped 13 percent.

The other risk this time is that all the portfolio shifts the plan envisions will swamp the Warsaw Stock market, where daily volume averages about 700 million zloty.

“We’re relieved that nationalizing the fund’s Warsaw stock assets isn’t being considered, but this proposal doesn’t eliminate all risks,” said Ryszard Rusak, a money manager at Union Investment TFI mutual fund in Warsaw. “Without proper regulations, the bourse may be overrun by supply as funds managing individual retirement accounts diversify away from stocks.”

[…]

The new plan, for which legislation hasn’t yet been drafted, calls for taking a quarter of current pension fund assets for the government. Those assets — foreign stocks, local corporate debt as well as bank deposits — will be transferred to the FRD, the government’s rainy-day fund. The remaining 75 percent — mainly the pension funds’ holdings of local stocks — will go into the individual accounts, to be managed by private investment companies.

New CalPERS CEO Marcie Frost, who was picked on Thursday amid strong endorsements from colleagues, didn’t waste time revealing bits of her thinking on the fund’s investment strategy.

Frost said private equity is an important part of the fund’s portfolio in this environment, and CalPERS might consider increasing its PE allocation to meet return targets. She also acknowledges valid criticisms of the asset class, including fee disclosure.

Frost takes her post on October 3.

From Bloomberg:

The new chief executive officer of the California Public Employees’ Retirement System said the largest U.S. pension fund may look to add more investments in private equity and real estate to increase returns and close its unfunded liability.

“When you’re looking at the low rate of return environment in the public markets, I don’t think you can ignore private equity,” Marcie Frost, who was named Thursday as the pension fund’s next CEO, said in a telephone conference with reporters. “This could be a low-rate environment for a period of time and we have to factor that in when we do our allocation work.”

[…]

Private equity managers, Frost said, have faced valid criticism in recent years for high fees and lack of transparency.

“The transparency — the full disclosure — is a very important piece of that,” she said. “Calpers has been a very strong leader in that area.”

Reporter Ed Mendel covered the California Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

The two big California public pension funds, CalPERS and CalSTRS, are going opposite ways on a controversial investment strategy, hedge funds, that is under fire from a powerful teachers union.

CalPERS announced two years ago that it was eliminating its $4 billion hedge fund program, citing their cost, complexity and one of its own investment principles: “Take risk only when we have a strong belief that we will be rewarded for it.”

CalSTRS adopted a “risk mitigation strategy” last November that will move 9 percent of its investment portfolio into long-term U.S. Treasury bonds and hedge funds with strategies designed to lose less value during recessions.

The different views of hedge funds is one of the biggest separations of investment strategy since CalSTRS, under legislation 34 years ago, took control of the teacher pension fund that had previously been managed by CalPERS.

Both funds have similar investment categories — stocks, bonds, private equity, real estate, liquidity, inflation — but with differing ratios and applications of the “ESG” screens (environmental, social and corporate governance) often used by large investors.

When the California State Teachers Retirement System became the manager after the legislation in 1982, the teacher pension fund was $10.9 billion. Now CalSTRS manages a $190 billion fund from its own new 13-story office tower.

It’s across the Sacramento River from the four-block complex where the California Public Employees Retirement System manages a fund worth $301 billion last week. With two of the largest and most impressive state buildings, the pension systems look prosperous.

But both are underfunded, with roughly 70 to 75 percent of the projected assets needed to pay future pensions. They are phasing in painful employer rate increases, while critics say overly optimistic earnings forecasts hide the need for even higher rate hikes.

Both funds have investments with money managers that follow the modern trend of institutional investors to “maximize shareholder value” (recently criticized here) by streamlining businesses, outsourcing jobs and cutting other costs.

As pension funds focus on cutting their own costs in what many expect to be a period of low investment earnings, the 1982 decision creating duplicate staffs and facilities for the two largest U.S. public pension funds may not look like a way to “maximize taxpayer value.”

Hedge funds, typically open only to large investors, use a variety of strategies aimed at out-performing the market and reducing risk. They are known for charging investors high fees and creating a class of wealthy hedge fund managers.

For some, hedge funds are the face of Wall Street greed. One hedge fund strategy, buying defaulted debt at a low price and relentlessly pushing for full repayment, made news this year with huge profits in a $4.65 billion settlement of a 15-year battle with Argentina.

In another debt squeeze, Bernie Sanders, the former Democratic presidential candidate, said last month “billionaire hedge fund managers on Wall Street are demanding that Puerto Rico fire teachers, close schools, cut pensions, and lower the minimum wage so they can reap huge profits off the suffering and misery of the American citizens on that island.”

The distressed debt strategy may be getting much of the attention. But the broader criticism of the thousands of hedge funds, which have a wide range of strategies and nearly $3 trillion in assets, is high costs and poor performance since the financial crisis.

“Hedge funds have underperformed, costing us millions,” Letitia James, an elected public advocate said as the New York City Public Employees Retirement System voted in April to end its $1.7 billion hedge fund program. “Let them sell their summer homes and jets, and return those fees to their investors.”

A Financial Times story in April said public pension funds in several states are considering dumping their hedge funds, nearly two years after CalPERS became the first big pension fund to eliminate hedge funds.

“At the time, many thought it would trigger a wave of redemptions,” the Financial Times said of the CalPERS announcement, “but with public boards tending to be deliberative, it is only now that the wave seems ready to break, hedge fund managers say.”

The CalSTRS decision last fall to increase hedge fund investments caught the eye of Randi Weingarten, president of the American Federation of Teachers, who is in a long-running battle with hedge fund managers, the Wall Street Journal reported last month.

Dozens of wealthy hedge-fund managers are said to have contributed millions to the promotion of charter schools (often opposed by teacher unions if they are not part of a public school system) and the reform of public pensions (often by advocating a switch to 401(k)-style plans common in the private sector).

Three years ago, Weingarten’s union published a list of roughly three dozen Wall Street asset managers that have donated to causes opposed by the union, the Journal said. Teacher pension funds with $1 trillion in assets were advised to use the list when making investment decisions.

“Why would you put your money with someone who wants to destroy you?” Weingarten told the Journal.

A hedge-fund manager who got himself removed from the union’s list, Cliff Asness of AQR Capital Management, remained on the board of the Manhattan Institute, a think tank said by the union to support charter schools and pension reform. The Journal said Weingarten viewed the CalSTRS hedge fund expansion as a chance to apply pressure last fall.

“Dan Pedrotty, an aide to Ms. Weingarten who runs the hedge-fund effort, spoke to a CalSTRS official about Mr. Asness’s continued service on the Manhattan Institute’s board,” the Journal reported. “The official then called Mr. Asness.”

Asness had already decided to leave the Manhattan Institute before receiving the CalSTRS call, his spokesman told the Journal, after reassessing the time that he was spending on non-profit boards.

Last week, a CalSTRS spokesman did not confirm or deny that a CalSTRS official called Asness at the request of the union, pointing instead to an Asness letter on July 4 replying to the Journal story.

“This article implies I left the Manhattan Institute’s board under such pressure, which is false,” Asness wrote. He said, among other things, that he is a supporter of public pensions and the mission of the Manhattan Institute, but not everything written under its banner.

Weingarten’s union published a report last fall, “All That Glitters Is Not Gold,” that criticized hedge funds for high fees and poor performance in recent years. CalSTRS was not among the 11 public pension funds analyzed in the report.

The CalSTRS chief investment officer, Chris Ailman, told CNBC in May that CalSTRS is “not a big fan” of hedge funds and invested in them in 2009-10, after many other pension funds rushed in during 2004 to 2007. He said CalSTRS invested in two hedge fund strategies, not 22 strategies like some of its peers.

Now CalSTRS is looking at a handful of hedge funds that are “counter-cyclical to growth,” Ailman said, and expected to provide some balance during recessions. He said “2 and 20 is dead,” referring to the traditional hedge fund fee of 2 percent of assets and 20 percent of profits as an incentive.

With a long-term risk management strategy to invest 9 percent of its portfolio, Ailman said, CalSTRS has a size advantage in fee negotiations that have already begun. “Our staff has put on their boxing gloves and gone in there and just laid it out, what we are looking for,” he said.

An outside review of the New York Common Retirement Fund – the second such review in 2016 – found the $178 billion fund is being managed well but is understaffed.

The review also suggested it pay its existing staff higher wages, and continue trying to cut investment costs associated with external managers.

The pension fund is being reviewed periodically after a pay-to-play scandal years ago.

From ABC:

In the latest review, released Thursday, Funston examined 96 investment transactions approved by the comptroller from April 1, 2012, through March 31, 2015, concluding that they all followed policies and legal requirements.

“We did not identify any instances of inappropriate or unethical behavior,” the report said.

Funston said most of its recommendations from three years ago, such as better documentation and computer support, were implemented. But the fund remains “severely understaffed for its scale and complexity, with underdeveloped risk analysis and management capabilities and an over-reliance on outsourced investment management and support functions.”

The reviewers noted the pay levels were in the bottom quarter among similar public pension funds, raising concern about staff turnover and recruiting. They again recommended adding staff and raising pay, anticipating lower overall costs by keeping more work in-house.

The fund, with 37 investment staff and 21 other employees, paid $561 million in outside management fees last year. That was up from $552 million a year earlier and $454 million in 2013.

“The reality is, in this environment, the fund doesn’t generate much of a return where the markets have been up and down and basically flat lately. The alternatives are where we’ve gotten the extra returns. So while there are more fees there, there’s been a benefit in terms of returns,” DiNapoli said. “We agree with the need to reduce fees. By having more staff, you could do more of this in-house.”