The Accounting Implications of Job-Hopping and the Shift to 401(k)s

401k savings jar

Two trends have been building in recent years, and now they are set to collide: on one hand, employers are increasingly shifting workers into defined-contribution plans. On the other, workers are becoming more likely to move between companies numerous times over the course of their working lives. Those trends together are bound to butt heads. Canover Watson writes:

As with many other major Western economies, the US in recent decades has seen its pensions landscape shift away from “defined benefit” (DB) to “defined contribution” (DC) plans […] The move from the former to the latter is unmistakable. […] DB plans tend to favour long-tenured employees, are not transferred so easily between employers, and so are less suited to a highly mobile workforce.

The effective result of this transition is that individual savings accounts, originally intended to supplement DB plans, have ended up supplanting them. This has rendered the question of optimizing returns from investments a cornerstone of the pension debate, as these returns now directly dictate the employees’ eventual retirement income.

Present and future retirees’ exclusive dependence on 401(k)s has upped the ante for all stakeholders–these funds need to achieve consistent returns required to provide liveable, income during retirement. But different funds and managers operate in different ways, and those differences are amplified when a worker switched employers numerous times. From Canover Watson:

What is required is the consistent application of a single accounting approach to underpin accurate portfolio valuations. The answer to achieving this, as with many things in our modern world, lies partly with technology and automation-namely the adoption of a master accounting system at the level of the pension fund.

The shift to DC plans and the multimanager model, both represent a step forward: the creation of a more sustainable, efficient system for ensuring that citizens are able to generate sufficient income for their retirement years. Yet, unless these changes are met with a more sophisticated, automated approach to accounting, pension returns ultimately will be short-changed by the march of progress.

To read the rest of this journal article, click here.

The article was published in the Journal of Pension Planning and Compliance.

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Troubled Dallas Fund Returns 4.4 Percent For 2013


The Dallas Police and Fire Pension Fund (DPFPF) knew 2013 wasn’t going to be a great year for investment returns. They knew this because 2012 wasn’t a great year, and neither were the five years prior.

Even as numerous funds across the country have struggled with maintaining strong investment returns over that period, the DPFPF was performing worse than most.

Bad investment results are what led to the June firing of top administrator Richard Tettamant. Still, the fund had hoped a 13 percent return was in the cards for 2013—not an overly impressive number, given the S&P 500 had returned around 25 percent over the same period.

But that didn’t come to fruition. DPFPF’s return data was released this month, and the fund posted a grim 4.4 percent return for 2013, failing to meet its lofty 8.5 percent assumed rate of return.

What makes DPFPF different from other funds? For one, asset allocation.

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According to the Center for Retirement Research, the average public pension fund allocates around 49 percent of its investments to equities, 7 percent to real estate and 27 percent to fixed-income strategies.

The DPFPF, on the other hand, invests significantly less in equities and bonds and significantly more in real estate. Its real estate investments did not do well.

Nor did its private equity investments. The fund says 45 percent of its private equity allocation is placed in two investments: Huff Energy and Red Consolidated Holdings.

Red Consolidated Holdings was flat on the year. But Huff Energy returned a negative 29.7 percent for 2013, which brought down the entire private equity portfolio.

This year isn’t an anomaly for the DPFPF. The fund has consistently under-performed its peers. From Dallas News:

Over the past five years, it has earned an annual return of 8.6 percent, according to preliminary figures from its consultant. That placed it 97th among about 100 similar-size funds, the consultant reported. The median annual return during that period was 12.2 percent.

In 2012, the fund earned 11.4 percent on its investments. The median annual return for similar funds was 12.2 percent.

The fund’s investment staff received big bonuses in 2013 nonetheless. That’s because the bonuses aren’t determined by how the fund performs relative to its peers. Instead, staff receive bonuses if investment performance beats the assumed rate of return.

Since the assumed rate of return for the DPFPF sits at 8.5 percent, the 2012 investment performance (11.4%) triggered the bonuses even though the fund under-performed relative to its peers.

Tettamant’s base salary in 2012 was $270,000, and he received over $100,000 in bonuses between 2012 and 2013.

Photo by Taylor Bennett via Flickr CC License

Canada Pension Plan’s Quarterly Returns Come Up Short; New $500 Million Investment On Horizon


The numbers are in for the Canada Pension Plan’s investment performance over the first quarter of fiscal year 2015, and the country’s largest pension fund probably isn’t thrilled with the results.

The CPP returned 1.6 percent over the three month period ended June 30. Far from disastrous, the performance still falls short of its peers: the median return of Canadian pension funds over the same period was 3 percent.

In a statement, Canada Pension Chief Executive Mark Wiseman said: “All of our programs reported positive investment returns during the quarter and we continued to further diversify the portfolio globally across various asset classes.”

To that end, the Canada Pension Plan’s Investment Board also announced today that it will be allocating an additional $500 million to investments in the U.S. industrial sector.

Specifically, the investments are in warehouse facilities in high-demand areas of California that will subsequently be leased out. From a CPP press release:

The six logistics and warehouse developments GNAP has committed to are:

  • GLC Oakland – 375,000-square-foot Class-A warehouse distribution facility recently completed in Oakland, California, adjacent to the Oakland International Airport.
  • GLC Rancho Cucamonga – two warehouse distribution facilities totaling up to 1.6 million square feet in Rancho Cucamonga, California, 40 miles west of Los Angeles, in the Inland Empire West submarket.
  • Commerce Center Eastvale – three logistics warehouses providing in excess of 2.5 million square feet located in Eastvale, California, 50 miles west of Los Angeles, in the Inland Empire West submarket.
  • GLC Fontana – 640,000-square-foot warehouse distribution facility located in Fontana, California, 50 miles west of Los Angeles, in the Inland Empire West submarket.
  • GLC Compton – 100,000-square-foot distribution facility in Compton, California, a prime infill location within the South Bay submarket of Los Angeles.
  • GLC Santa Fe Springs – three warehouse distribution facilities totalling up to 1.2 million square feet located in Santa Fe Springs, California, a prime infill location within the Mid-Counties submarket in Los Angeles.

The CPP already had allocated $400 million to the Goodman North American Partnership (GNAP), a joint venture formed between the CPP Investment Board and Goodman Group.


Photo: “Canada blank map” by Lokal_Profil. Licensed under Creative Commons Attribution-Share Alike 2.5 via Wikimedia Commons

Survey: Pensions Funds Will Continue To Increase Alternative Investments

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Often, media narratives don’t properly reflect the reality of a situation.

For example, news has been breaking over the past few weeks of pension funds decreasing their exposure to hedge funds and alternatives. That includes CalPERS, who plan to chop their hedge fund investments dramatically. The reason: high fees associated with those investments are eating into returns.

But according to a new report, pension funds are planning to increase their allocations toward alternatives, more than any other asset class, for years to come.

Consulting firm McKinsey & Co. surveyed 300 institutional investors about their future plans investing in alternatives. (McKinsey defines “alternatives” as hedge funds, funds of funds, private-equity funds, real estate, commodities and infrastructure investments.)

As for the question of whether funds will continue to invest in alternatives, the answer was a resounding yes: the respondents indicated they would like to increase their exposure to alternatives by 5 percent annually.

The reportnotes that pension funds believe their traditional investments, which have been garnering great returns as the bull market saunters on, run the risk of not meeting actuarial return assumptions in the medium-term, or when the market comes down off its high. At that point, pension funds want to be invested in higher-yielding instruments to meet return assumptions. From CFO Magazine:

McKinsey suggests that the bull market, now more than five years old, can’t be expected to continue indefinitely. Indeed, the report says institutional investors that manage money for pension plans are moving more money into alternatives out of “desperation.”

“With many defined-benefit pension plans assuming, for actuarial and financial reporting purposes, rates of return in the range of 7 to 8% — well above actual return expectations for a typical portfolio of traditional equity and fixed-income assets — plan sponsors are being forced to place their faith in higher-yielding alternatives,” McKinsey writes.

But, the consulting firm notes, the rapid growth of alternatives is not simply the result of investors chasing high returns. “Gone are the days when the primary attraction of hedge funds was the prospect of high-octane performance, often achieved through concentrated, high-stakes investments. Shaken by the global financial crisis and the extended period of market volatility and macroeconomic uncertainty that followed, investors are now seeking consistent, risk-adjusted returns that are uncorrelated to the market.”

The Los Angeles Fire and Police Pensions fund is at least one fund going against the grain here: it recently took 100 percent of its money out of hedge fund investments.

Memphis’ Pension Fund Is Considering Going All-In On High-Risk Strategies


For the last two years, the City of Memphis Pension Fund has been considering an overhaul in investment strategy. The strategy: re-allocating hundreds of millions of dollars from U.S. stocks and bonds into higher-risk investments. That entails increased allocations toward private equity, hedge funds, foreign stocks and bonds and real estate investments.

On August 28, the board that makes investment decisions for the fund will vote on the change in policy.

The board had already voted at its last meeting to allow the fund to double its real estate investments, from 5 percent of its portfolio to 10 percent.

More from the Commercial Appeal:

The strategy, recommended by investment advisory firm Segal Rogerscasey, was introduced to the pension board last week by pension investment manager Sam Johnson and city Finance Director Brian Collins.

It increases loss risk but could lead to bigger rewards.

Collins said the board’s investment committee had been reviewing the changes for two years and that investments in international securities would help the fund achieve its target 7.5 percent return. “So much of the high single-digit and double-digit growth is outside our borders,” Collins said.

The pension board decided Thursday to delay a vote on the investment strategy until at least its next meeting, scheduled for Aug. 28. The board did vote to allow the City Council to consider a proposal to raise the proportion of real estate investment from 5 percent of the pension portfolio to 10 percent.

The strategy might work, Fuerst said, but there’s a risk. “If they don’t accomplish those returns, it would mean the need for sharply higher contributions, or possibly the type of situation you’ve seen in Detroit, where you’ve seen benefit cutbacks.”

Memphis’ Finance Director was quick to defend the proposed changes. Increase allocations in private equity, he pointed out, doesn’t automatically mean more risk.

He also laid out the specific allocations he envisioned the fund making toward various higher-risk, higher-return investments:

Under the plan he presented, the pension fund would invest 4.4 percent of its portfolio in private equity companies, which often specialize in buying troubled companies, turning them around and reselling them for a profit.

The pension would invest 4.2 percent of its holdings in hedge funds, private investment groups run by money managers who pursue a wide range of strategies.

The city would sell some U.S. stocks and bonds, reducing their combined percentage of the portfolio from 73 percent to 49.7 percent.

The pension fund would increase its holdings of foreign stocks from 22 percent of the portfolio to 31.7 percent. The fund would also invest 13.4 percent of the portfolio in bonds issued outside the U.S.

As of June, the Memphis Pension Fund was valued at $2.2 billion. As such, even a re-allocation of a few hundred million dollars would result in a significantly altered asset allocation compared to the current distribution of assets.

Oklahoma Teachers’ Retirement System Rakes in 22 Percent Returns


Driven in large part by index-beating equity investments, the Oklahoma Teachers’ Retirement System returned 22 percent for the fiscal year 2013-14, according to the System’s director. That number takes into account investment expenses and manager fees.

The System outperformed its internal benchmark, which was 18.1 percent for 2013-14. A more detailed breakdown of returns from Pensions and Investments:

The top performer was master limited partnerships, which returned approximately 42%, followed by total domestic equity, 27.6%; international equity, 21.1%; high-yield bonds, 12.5%; and core fixed income, 7.9%. Real estate and private equity returns were not provided.

Longer term, the pension returned a compound annualized 13.6% for the three years ended June 30, 16.1% for five years and 9% for 10 years.

As of June 30, the pension fund’s actual asset allocation was 45.7% domestic equity; 22.2% total “non-core” assets, which consists of 8.8% MLPs, 5.5% high-yield bonds, 4.1% real estate, 2.6% private equity and 1.2% opportunistic assets;, 16.6% international equity, 14.9% core fixed income and the rest in cash. The pension fund’s target allocations are 40% domestic equity, 25% total “non-core” assets and 17.5% each international equity and core fixed income.

Pensions and Investments also reports that several of the firms with which the pension fund invests with have been put “on alert”. From P&I:

Geneva Capital Management was put “on alert” as a result of being acquired by Henderson Global Investors. Geneva Capital Management runs a $186 million domestic small-cap growth equity strategy for Oklahoma Teachers.

Lord Abbett was put also put on alert for personnel changes. Lord Abbett currently manages $603 million in a core fixed-income strategy and $262 million in a high-yield fixed-income strategy for the pension fund.

Being put on alert is a step below being placed “on notice,” which is the last step before termination.


Photo: “Flag-map of Oklahoma” by Darwinek – self-made using Image:Flag of Oklahoma.svg and Image:USA Oklahoma location map.svg. Licensed under Creative Commons Attribution

Montana Funds Return 17 percent for Fiscal Year


The Montana Board of Investments, the entity that manages investments for the state’s pension funds, released its annual return data yesterday. As a whole, the Board pulled in a return of just over 17 percent for fiscal year 2013-14. From the Missoulian:

State investments showed a return of 17.17 percent on all pension investments in the fiscal year that ended June 30.

The state Board of Investments’ return for the year was approaching the historic high return for the board, which was 21.8 percent in 2011. The return last year was 13 percent.

These percentages are net returns, calculated after all investment expenses are paid.

Montana has been in the top 25 percent of its peers for the past three years.

Since the Board of Investments’ inception in 1972, its overall earnings are 7.93 percent, exceeding the 7.75 percent needed to fund the pension systems.

The investments have bounced back since state pension funds lost a fourth of their money during the national recession in 2008 and 2009.

“The taxpayers of Montana re the winners with today’s announcement,” Gov. Steve Bullock said. “At a time when other states are forced to raise taxes to fix their pension problems, Montana has fixed our public pensions without increasing taxes.”

Bullock said the state is continuing to improve its financial picture through prudent investments of cash holdings and investments.

Over the same period, the S&P 500 returned approximately 21 percent.


Photo: “Winnett MT Rims South of Town” by J.B. Chandler – Own work. Licensed under Creative Commons

Maryland’s Top Fund Returns 14 Percent for Year


The Maryland State Retirement and Pension System is the latest fund to release its investment performance data for fiscal year 2013-14, and the fund returned over 14 percent for the year, the System’s second consecutive year of double-digit investment returns. From the Baltimore Post-Examiner:

Maryland’s pension system for state employees and teachers had another strong investment performance for the fiscal year which ended June 30 earning 14.37%, bringing the value of the portfolio to $45.4 billion, a gain of more than $5 billion.

It was the second year in a row of strong performance due to sharp upturns in stocks, according to Chief Investment Officer Melissa Moye. The fund exceeded its target of 7.7% and its market benchmark of 14.16% — what its basket of assets would have been expected to earn.

The System is still in a hole due to its unfunded liabilities, which sit at about $20 billion. But the major credit rating agencies, even while weary of the liabilities, have commented on the improved health of the system of late as the effects of several reform measures have been positively felt. From the BPE:

These liabilities are consistently mentioned as a negative financial factor by all three bond rating agencies as they did earlier this month.

But the three New York agencies also note the improvements made in Maryland’s pension outlook after employee contributions were raised and benefits reduced by the legislature in 2011.

“The funds annual returns continue to reflect the strong market environment that has prevailed since the end of the credit crisis,” State Treasurer Nancy Kopp, chair of the pension board, said in a statement.

Typically, the System released investment performance figures by asset category. This year, the system only released aggregate returns and did not specify returns by asset category, although those figures may be released to the public eventually.

The S&P 500 returned around 21 percent for fiscal year 2014.