Author: Ted Ballantine

Kentucky’s retirement systems aren’t immune from lawsuits related to “illegal or imprudent” investments, according to a court ruling last week.

[Read the ruling here.]

The class action suit, filed in 2014 by the city of Fort Wright, claims the Kentucky Retirement Systems (KRS) made excessively risky investments in alternatives which demanded high fees and under-performed.

KRS claimed it had sovereign immunity.

From the Lexington Herald-Leader:

The suit, filed as a class action in 2014 by the Northern Kentucky city of Fort Wright, alleges that KRS violates the law with risky investments in hedge funds, venture capital funds, private equity funds, leveraged buyout funds and other “alternative investments” that have produced small returns and excessive management fees.

In its defense against the suit, KRS said it could not be sued because of sovereign immunity — a legal concept that generally protects governments from legal liability.

A Franklin Circuit Court judge rejected KRS’ defense, a decision the Court of Appeals upheld on Friday. Among the flaws in KRS’ argument, the appeals court said, the law establishing the KRS board of trustees explicitly says the board can sue and be sued in return.

“As a contributor to (KRS) on behalf of its employees, the city has an interest in requiring the board to act in accordance with the law,” Judge Christopher Shea Nickell wrote for a unanimous three-judge panel.

The city’s suit now proceeds in Franklin Circuit Court.

The vast majority of plan sponsors have renegotiated record-keeping fees since 2013, according to a survey conducted by consulting firm NEPC.

Retirement plan costs are lower than at any point in the survey’s history.

Details from PlanSponsor:

Since 2013, 81 percent of the 117 plan sponsor respondents report having renegotiated their recordkeeping fees; 51 percent of the plans in the survey, which had an average size of $1.1 billion in assets, now apply a per-participant fee for recordkeeping.

Total investment management fees averaged 42 basis points, down from 57 basis points in 2006 and 46 basis points in 2014.

Average recordkeeping costs were $57 per participant last year, down from $92 in 2011.

An NEPC partner mused whether, at some point, the lower fees would affect service levels. From PlanSponsor:

Ross Bremen, a partner at Boston-based NEPC, expected fees to show some leveling in this year’s report.

“While lower fees reflect the good work sponsors have done to reduce fees on participant’s behalf, at some point service levels could suffer,” said Bremen in a statement accompanying the report. “A race to the bottom, at the risk of sacrificing service and innovation, is not in the participants’ best interests.”

[…]

The trend to a strict per-participant fee structure for recordkeeping services is removing flexibility from plan design as a growing consensus of retirement experts, policymakers and participant advocates say savers need more personalized savings and decumulation strategies.

“The idea that recordkeeping is a commodity is just not the case,” said Bremen, who noted that 21 percent of surveyed plans do not use any revenue-sharing agreements to help shoulder the cost of plan services.

CalPERS chief actuary Alan Milligan, who is retiring, told top fund officials on Tuesday to consider lowering the fund’s discount rate to 7.25% by February.

CalPERS’ discount rate currently sits at 7.5%.

Milligan’s most recent report predicts a period of lower (6-ish percent) annual returns over the next ten years.

More from the LA Times:

Alan Milligan, who is stepping down as chief actuary of the California Public Employees Retirement System, told the agency’s directors that investment returns continue to come in lower than expected and the pension fund should recalibrate its long-term investment prediction — the “discount rate” — no later than February.

“If you were to adopt a lowering of the discount rate now, that would buffer the impact” on state and local government budgets, Milligan said at the meeting in Sacramento.

[…]

Milligan told the CalPERS directors that they should consider lowering the long-term discount rate to 7.25%, though his report on Tuesday projected the coming decade will only see an average return of 6.12%.

“The capital markets are simply not expecting to return as much in the next 10 years or so as they have historically,” Milligan said.

CalSTRS CIO Chris Ailman joined Bloomberg this week to discuss his fund missing its return target for a third consecutive year; and other problems facing the pension fund.

See the video, above.

Video credit: Bloomberg

CalSTRS CIO Chris Ailman joined Bloomberg this week and tackled several topics: the pension fund’s decision to dump thermal coal assets (video above), a move announced back in February; and Federal Reserve interested rates (video below).

Video credit: Bloomberg

The Illinois State Board of Investment, which oversees several state pension funds, voted on Thursday to axe all active managers in the portfolio of the state-administered 401(k) plan.

About 52,000 residents are enrolled in the defined contribution system, which can be chosen by workers instead of a traditional defined benefit.

The shift came down to two things: performance and fees.

More from the Wall Street Journal:

The Illinois State Board of Investment, in a 7-to-1 vote on Thursday, jettisoned mutual funds sold by T. Rowe Price Group Inc., Fidelity Investments, Invesco Inc. and four others.

The pullback means roughly $2.8 billion of Illinois state-employee retirement assets—representing roughly two-thirds of the $4 billion fund—would now be in the hands of Vanguard Group and Northern Trust.

The shift would dramatically reduce outside management fees paid plan-wide, dropping from more than $10 million annually to $1 million, Marc Levine, the board’s chairman, said in an interview. On a per-participant basis, it equates to fees being shaved to about one-fourth of the previously paid total.

[…]

The shift means Illinois state workers, legislators and judges—those participating in the 401(k)-style fund—would choose from between seven categories of investments rather than 16. All the holdovers will be so-called “passive” funds that strive to imitate, not outsmart, the markets.

“We’re taking all that complexity out,” Mr. Levine said.

A tax on sewer and water usage, revenues from which will go to Chicago’s four pension funds, received final approval from city lawmakers on Wednesday.

This move comes on the heels of several other tax hikes designed to help improve the funding of the city’s pension funds, which are flirting with insolvency.

From Reuters:

The tax, passed in a 40-10 city council vote, is projected to raise an estimated $240 million a year once it is fully phased in over five years, helping Chicago gradually increase contributions to its municipal retirement system, which is projected to run out of cash within 10 years.

[…]

Chicago has already authorized a phased-in $543 million property tax for its police and fire retirement systems and a telephone surcharge increase for its laborers’ pension fund.

For the municipal fund, an actuarially required funding level would be reached in 2023, when the payment would spike to nearly $879 million from $577 million in 2022, according to city documents. The aim of the plan is to bring the retirement system’s funded level to 90 percent in 2057.

Some aldermen have raised concerns that even with the new tax revenue, the city will be short $300 million in 2023.

The city’s next step involves the Illinois Legislature, which will be asked in November to approve the new funding schedule for the municipal system, as well as one for the laborers’ fund.

 

Jerry Brown on Thursday signed a law requiring California’s public pension funds to disclose fees and carried interest paid to alternative asset managers.

The new law appears to make very few people happy on any side.

As we’ve written previously, advocates of disclosure say the law doesn’t go far enough and was gutted in backroom meetings. Meanwhile, some public pension officials have publicly worried the law would make it difficult to do business with asset managers.

From ai-cio:

The new law, which affects commitments to private equity, venture capital, hedge funds, and absolute return funds, will apply to investments made on or after January 1, 2017.

“California taxpayers and pension beneficiaries will now get to go behind the curtain to view the previously hidden fees and charges paid to Wall Street firms,” said State Treasurer John Chiang, who sponsored the bill.

Public pensions based in California—including the California Public Employees’ Retirement System (CalPERS) and California State Teachers’ Retirement System (CalSTRS)—will be required to “undertake reasonable efforts” to obtain and disclose fee information, as well as the gross and net rate of return of alternative investment vehicles, at least once annually at a meeting open to the public.

As for the watering down of the original bill, Naked Capitalism’s Yves Smith writes:

AB 2833 has gaping holes that will allow general partners to structure related party payments to escape reporting. The bill, which you can read here, has a very long and complicated definition of what constitutes a related party. It is inferior to shorter and more comprehensive definitions in earlier drafts.

[…]

AB 2833’s definition of “portfolio company” allows payment to be routed through other entities. The definition of “portfolio company” is more obviously deficient than that of “related party” and again allows the bill to be circumvented:

“Portfolio companies” means individual portfolio investments made by the alternative investment vehicle.

Huh? What does “individual portfolio investments” mean? This language does not map onto legal entities or contractual relationships. But by saying “individual,” that would appear to set up the argument that the portfolio company is only “individual” meaning the senior-most legal entity that owns fund assets. But private equity funds seldom invest directly in a portfolio company. For tax and other reasons, there are often “blocker” legal vehicles and other legal entities that sit between the private equity fund and the investee business. It thus appears that general partners could launder the former portfolio company fees through legal vehicles that sit above the portfolio company. For instance, Portfolio Company contracts with Intermediate Co. which has a mirror contract with the general partner or a related party.

Reporting is at far too high a level of abstraction to allow for verification or cross-checks. Another major flaw in the bill is that it fails to report fees quarterly, as the unhappy 13 major trustees had called for, and is nowhere near granular enough to allow them to map the fees back to either portfolio company activities or limited partnership agreements. It simply calls for an aggregate of fees and costs, reported on a pro-rata basis for the fund and also by the portfolio companies.

Bear in mind that the previous version of the bill required that all related party transactions be reported. The current version calls only for providing each CA public fund with its pro rata share of those fees.

At Pension360, we like to keep tabs on strides in pension system transparency.

This week, all of Ohio’s pension funds joined the state’s “online checkbook” — making Ohio the first state where all of its pension funds have put its finances online for public perusing.

More from the Columbus Dispatch:

Representatives from Ohio’s five statewide public pension funds joined Ohio Treasurer Josh Mandel on Tuesday in announcing the financial information is now available at OhioCheckbook.com, the state’s online checkbook site.

The agencies are the Ohio Public Employees Retirement System, State Teachers Retirement System, School Employees Retirement System, Ohio Highway Patrol Retirement System and Ohio Police and Fire Pension Funds. They cover more than 132,000 individual transactions totaling in excess of $720 million in recent years.

“A pension system that is responsible for the stewardship of member and employer contributions must always operate in full view of the public,” said Karen Carraher, director of the Public Employees Retirement System, largest of the five.

The teachers system, covering nearly 500,000 active, inactive and retired teachers, is “pleased to partner with the treasurer’s office on this transparency initiative to include STRS Ohio’s administrative expenses on the Ohio Checkbook,” said Executive Director Michael Nehf.

Mandel, who started the online checkbook almost two years ago, said his idea is to “create an army of citizen watchdogs who are empowered to hold public officials accountable.”

Only 28 percent of small businesses offer their employees a 401(k) plan, according to a report from SurePayroll.

Forty-two percent of small business owners surveyed said they don’t see the value in a 401(k) plan; 35 percent say the fees are too high.

More from PlanSponsor:

Only 28% of small businesses offer a 401(k), with 6% planning to add one soon. This runs counter to the 34.4% who say that a 401(k) plan is the primary way they will save for retirement, followed by earnings from their business (24.7%), a traditional or Roth individual retirement account (13.7%), real estate investments (not including their home—9.3%), and stocks, bonds and cash outside of a retirement account (8.9%).

Among the small businesses that are offering a 401(k), only 5% say they are doing so to attract new employees, and only 6% value the tax breaks.

“There needs to be more education for small business owners about the tax benefits and the long-term growth potential of investing in a 401(k) plan,” says SurePayroll General Manager Andy Roe. “The fees really are minimal when you consider the benefits to you and your employees. The plans available today make it very easy to manage, and your payroll provider can help guide you. It’s a growth opportunity for business owners.”