Illinois Lawmakers Introduce Bill Barring Pensions From Investing In Trump’s Wall

Illinois Democrats this week introduced a bill that would bar the state’s pension funds from investing in any company that gets a contract to work on president-elect Donald Trump’s still-hypothetical “Wall”.

The Wall, one of the cornerstones of Trump’s campaign, seems less likely to happen lately. But if construction does begin, lawmakers don’t want Illinois’ pension money to be part of “a message of hate to immigrants in this country”.

From the Chicago Tribune:

Democratic lawmakers unveiled legislation on Tuesday that would prevent Illinois pension funds from investing in any companies that hold contracts to help build a wall along the Mexican border, as promised by President-elect Donald Trump.

Sponsoring Rep. Will Guzzardi, who represents a majority Latino district on Chicago’s Northwest Side, said the bill is designed to send a message that taxpayer funds should not “be used to help send a message of hate to immigrants in this country.”

“Walls aren’t terribly effective with keeping people out,” Guzzardi said. “What walls are, walls are symbols. And Donald Trump’s proposal to build a wall with our border is trying to send a message that the people on the other side of that wall are dangerous.”

Under the legislation, the Illinois Investment Policy Board would conduct a review every four months to ensure the state is not investing in companies that receive federal contracts to work on the border wall. Last year, lawmakers approved legislation that required the state pension systems to stop investments in companies that boycott Israel.


Republican Gov. Bruce Rauner declined to weigh in on the legislation, saying he needed to review it further. But he said it was time to move past the “appalling” rhetoric of the campaign, saying “the people of Illinois value inclusion and tolerance and diversity.”


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401(k) Nepotism: Menu-Setters Show Favoritism Towards Own Funds, Says Study

Do 401(k) service providers show favoritism towards their own mutual funds when setting investment menus?

This is the question that three researchers – Clemens Sialm, Irina Stefanescu and Veronika Pool – sought to answer in a new paper published in the Journal of Finance.

The short answer, according to the paper, is that setting a 401(k) menu is not a purely meritocratic process: plan sponsors are influenced by service providers to include propriety funds on menus, and poor-performing affiliated funds are less likely to be removed from menus. These under-performing funds then continue to perform poorly.

The authors find that affiliated funds are less likely to be removed from investment menus than unaffiliated funds regardless of past performance; but the disparity widens for the poorest-performing affiliated funds. From the paper:

The figures show that affiliated funds are less likely to be deleted from a 401(k) plan than unaffiliated funds regardless of past performance. More importantly, the difference in deletion rates widens significantly for poorly performing funds. For example, funds in the lowest performance decile in Panel A have a probability of deletion of 25.5% for unaffiliated funds but of only 13.7% for affiliated funds. Indeed, the deletion rate of affiliated funds in the lowest performance decile is lower than the deletion rates of affiliated funds in deciles two through four.

Overall, the difference in deletion rates between affiliated and unaffiliated funds is statistically significant for the nine lowest performance deciles.

The researchers bring up a solid rebuttal to their own thesis: what if service providers aren’t simply displaying favoritism; what if providers actually have more favorable, superior information on their own funds?

So, the authors investigated:

While our evidence on favoritism is consistent with adverse incentives, plan sponsors and service providers may also have superior information about the affiliated funds. It is therefore possible that they show a preference for these funds not because they are necessarily biased toward them, but rather due to favorable information that they possess about these funds. To investigate this possibility, we examine future fund performance. For instance, if, despite lackluster past performance, the decision to keep poorly performing affiliated funds on the menu is information-driven, then these funds should perform better in the future. We find that this is not the case: affiliated funds that rank poorly based on past performance but are not deleted from the menu do not perform well in the subsequent year. We estimate that, on average, they underperform by approximately 3.96% annually on a risk- and style-adjusted basis. These results suggest that the menu bias we document in this paper has important implications for employees’ income in retirement.

The full paper – which presents its arguments in significantly more depth than presented in this post – can be read in full here.


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California Lawmakers Pass Divisive Private Equity Transparency Bill


The California state legislature has passed a controversial bill, formally called AB 2833, which aims to improve reporting and disclosure of fees paid by public pension funds to private equity firms and hedge funds.

The bill awaits Gov. Jerry Brown’s signature.

The bill has been championed for months by State Treasurer John Chiang; but observers have raised questions about the effectiveness of the bill, and whether it was “gutted” from its original form.

The Wall Street Journal describes the bill:

Once the bill is signed into law, California pensions must report all fees and expenses they pay to new private-equity funds they invest with from 2017 onward. They will be required to disclose the costs borne by portfolio companies that are then passed on to private-equity fund investors, charges often hidden from view. They also will have to report the share of deal profits—also known as carried interest—collected by each private-equity fund manager.


As the bill wound through the California state legislature over the past year, it drew mixed responses from pensions and raised questions about whether investors are ready to reckon with private equity’s full costs. Even as pensions try to get a handle on investment fees and expenses, some fear being too demanding would drive top managers away.


In the end, the bill was adjusted to become less heavy handed, with later versions of the bill giving each California investor the flexibility to seek the data in any format.

Some observers, like Naked Capitalism’s Yves Smith, aren’t happy with the bill’s “adjustments”. 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.

John Chiang wrote a letter to the New York Times defending the bill against its detractors, which include Times writer Gretchen Morgenson. From his letter:

Should Assembly Bill 2833 become law, it would impose the most robust transparency requirements in the nation on private equity firms. For the first time, California public pension funds will be allowed behind the curtain to view previously hidden fees and charges that are paid to general partners and related parties.

Ms. Morgenson cites the concern of a former Calpers board member that my measure presents “less than a full picture” because it discloses only the related-party costs allocated to California public pension funds. I am open to sponsoring future legislation requiring broader disclosure of related-party transactions affecting private sector or non-California investors.

However, today, I am more concerned that our pension fund members and taxpayers are given a full picture of their share of total investment costs. A.B. 2833 does that. This type of disclosure is crucial given that every dollar paid in fees is one less dollar available for promised benefits.


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Columbia, Four Other Schools Latest To Be Hit With ERISA Suits; Could Signal “Race to Courthouse”

The wave of ERISA lawsuits against top schools’ 401(k) and 403(b) plans continued rolling this week.

The University of Pennsylvania, Johns Hopkins University, Vanderbilt University and Emory University were slapped with lawsuits early this week; more recently, Columbia University joined the fray on Wednesday.

The Columbia suit was, notably, brought by a different law firm than the rest. Observers say it could signal a “race to the courthouse” that could see others firms target new schools.

[Read the Columbia complaint here.]

All the lawsuits are targeting the fees associated with the schools’ 401(k) and 403(b) plan offerings.

More from PlanAdviser:

Excessive fee lawsuits have been filed against 403(b) plans of Emory University, the University of Pennsylvania, Johns Hopkins University and Vanderbilt University.

The complaints are nearly identical to those filed against MIT, New York University, Yale and Duke University, alleging that instead of using the plans’ bargaining power to benefit participants and beneficiaries, the defendants allowed unreasonable expenses to be charged to participants for administration of the plans, and retained high-cost and poor-performing investments compared to available alternatives. And, the suits call out the traditional 403(b) plan model of offering multiple funds (fund lineups of the plans in the suit ranged from 78 to more than 400), including individual annuities, and using multiple recordkeepers.

The cases accuse the plans of not performing a competitive bidding process to consolidate recordkeepers and/or negotiate better recordkeeping fees. They also allege the plans used revenue-sharing.

Details on the Columbia suit, from InvestmentNews:

The plaintiff in the proposed class-action lawsuit is seeking $100 million from Columbia for losses suffered by two retirement plans and their participants due to the allegedly unreasonable investment management and record-keeping fees.


The Columbia lawsuit stands out among others in the group because it was filed by the law firm Sanford Heisler, not Schlichter, Bogard & Denton, the firm responsible for the prior eight university suits, and whose managing partner, Jerry Schlichter, has been a pioneer of excessive-fee litigation against 401(k) plans.

Indeed, the Columbia lawsuit represents the first Sanford has brought in the ERISA excessive-fee realm, according to Charles Field, partner at the firm and co-chair of its financial services group.

The Columbia case raises the question of how many other firms will “jump on the bandwagon” to sue universities, said Duane Thompson, senior policy analyst at fi360 Inc., a fiduciary consulting firm.

“It looks like we’re seeing a race to the courthouse,” Mr. Thompson said. “You’d have to think the few Ivy League schools that aren’t on this list yet are combing frantically through their investment policy statements.”


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Top Universities Sued Over 401(k) Fees; Duke Latest to Be Hit With Suit

Lawsuits have been filed against New York University, MIT and Yale for alleged high-fee options in the schools’ 401(k) plans.

The three class-action suits, each filed by employees of the schools, allege breach of fiduciary duty for imprudent, high-priced investment options.

As of Thursday morning, Duke University was hit with a similar suit.

[Read the Duke complaint here.]

More from

Yale and NYU were accused specifically of causing plan participants to pay “excessive” administrative fees by using multiple record keepers, while simultaneously failing to “prudently consider or offer dramatically lower-cost investments that were available.”

The complaints also accused both plan sponsors of selecting and retaining a “large” number of duplicative investment options, “diluting” their ability to pay lower fees and “confusing participants”. They further “imprudently retained historically underperforming plan investments,” the plaintiffs argued.

MIT, meanwhile, was sued over its “extensive relationship” with Fidelity Investments, which plaintiffs said led to the university choosing the firm as its record keeper without conducting a “thorough, reasoned” search.

“Fidelity’s relationship with MIT, and the benefits MIT has derived from it, has secured Fidelity’s position as the plan’s record keeper without any competitive comparison from outside service providers,” the complaint stated, resulting in “unreasonable administrative, as well as investment management, expenses.”

The same law firm also hit Duke with a suit on Thursday morning.

More on the Duke suit, from NAPA:

Duke University, which has, in the most recent class action filing by the law firm of Schlichter, Bogard & Denton, been charged with a series of fiduciary breaches, including providing “…a dizzying array of duplicative funds in the same investment style,” relying on the services of four recordkeepers, carrying actively managed funds on its plan menu when passives were available, having recordkeeping charges that were asset-based, rather than per participant, and not using its status as a “jumbo” plan to negotiate a better deal for plan participants, among other things.


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CalPERS Returns 0.6% in Tumultuous FY 15-16

Credit: CalPERS release
Credit: CalPERS release

The portfolio of the U.S.’ largest pension fund returned 0.6% in fiscal year 15-16, marking CalPERS’ worst return since 2009 and the second consecutive year of underperformance relative to its 7.5 percent discount rate.

From Reuters:

Speaking at a CalPERS meeting, Chief Investment Officer Ted Eliopoulos said performance for the year was driven primarily by global equity markets, which represent a little over half of the fund’s portfolio. Equities delivered a return of negative 3.4 percent.

“When 52 percent of your portfolio is achieving a negative 3.4 percent return, that certainly sets the main driver for the overall performance of the fund,” said Eliopoulos, who had projected flat returns for the year in June.

Inflation assets returned a negative 3.6 percent return, helping drag down the fund’s overall performance, Eliopoulos said.

Fixed income and real estate investments were bright spots in the portfolio, posting 9.3 percent and 7.1 percent returns respectively.

In response to the drop from previous years, Eliopoulos said CalPERS would reduce risk from its portfolio and have simpler investments that do not require paying fees to money managers.

NJ Supreme Court: No Contractual Right to COLAs

The New Jersey Supreme Court on Thursday sided with Chris Christie and ruled that state employees had no contractual right to cost-of-living adjustments.

Christie in 2011 signed a law that froze pension COLAs for state workers, prompting a lawsuit that ended today.

From Bloomberg:

New Jersey Governor Chris Christie and the Legislature acted legally in suspending cost-of-living adjustments for retired public workers, the state Supreme Court ruled in a case that might have cost taxpayers billions of dollars.

Christie and lawmakers halted COLA payments in 2011 as part of a pension bill that forced hundreds of thousands of employees to pay more into the underfunded system and raised their retirement age.


A group of 26 retired attorneys sued over the COLA suspension, arguing they had a contractual and constitutional right to pension payments and increases pegged to the Consumer Price Index. They cited a 1997 law that established “certain non-forfeitable” contractual rights to a “benefits program” that would not be reduced.


The state is one of many grappling with underfunded pensions. At the end of 2015, state and local government retirement systems had $1.7 trillion less than they will eventually need, up from a $293 billion shortfall eight years earlier, according to Federal Reserve Board figures. New Jersey confronts an $83 billion pension liability that is growing and has led to a record nine credit-rating downgrades since Christie took office.

The Court’s rulings in the last 12 months have not been kind of public workers. Last June, the same court ruled that Christie acted legally when he skipped $1.6 billion worth of pension contributions in defiance of the 2011 law requiring him to make those payments.


Photo by Bob Jagendorf from Manalapan, NJ, USA (NJ Governor Chris Christie) [CC BY 2.0 (], via Wikimedia Commons

U.S. Treasury Rejects Central States’ Benefit Cuts

The U.S. Treasury Department on Friday rejected the Central States Pension Fund’s proposal to cut member benefits by as much as 50 percent.

Renowned mediator Kenneth Feinberg made the decision.

Here’s why Fienberg rejected the plan, according to the Kansas City Star:

In a 10-page letter to the pension fund, Feinberg said it failed on three tests.

The proposal failed to reasonably show it would avoid the pension fund’s looming insolvency, it failed to distribute the benefits cuts equitably and notices to those covered by Central States were not written in a way that they would be understood by the average participant in the fund.

“We will not accept it. We cannot accept it,” Feinberg said during a conference call with reporters. “No benefit cuts are permitted pursuant to this law.”

Central States has about 400,000 members.


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CalSTRS CIO Ailman: 2 and 20 Model Is “Dead”

CalSTRS CIO Chris Ailman spoke to CNBC during a lull at the Milken Institute Global Conference on Monday.

The interview featured an interesting tidbit: Ailman indicated that the two and 20 model – the traditional fee structure for alternative investments – is “dead”.

Watch the interview above.

From CNBC:

To find yield in the current low-interest-rate environment, CalSTRS has invested in select hedge funds. But Ailman said the pension fund is not paying the alternative investment class’s notoriously high fees.

“Two and 20 is dead. People have to understand that. That model has been broken,” he said during an interview on the sidelines of the Milken Institute Global Conference on CNBC’s “Squawk on the Street.” Ailman was referring to the typical hedge fund fee structure in which portfolio managers charge 2 percent of total asset value and 20 percent of the portfolio’s returns.

Video credit: CNBC

New York City’s Largest Pension To Exit Hedge Funds

new york

The New York City Employees Retirement System (NYCERS) voted on Thursday to liquidate its hedge fund portfolio, according to a trustee.

The pension fund currently has 3 percent of its total assets allocated toward hedge funds.

More from Reuters:

The board of New York City’s largest public pension fund voted on Thursday to stop future investments in hedge funds and unwind all current investments in the asset calls, according to the city’s public advocate, a trustee at the pension fund.

The board of the New York City Employees Retirement System (NYCERS) voted to stop all future investments in hedge funds and “liquidate NYCERS hedge fund investments as soon as practicable in an orderly and prudent manor.”

A report broke yesterday that the trustees were considering exiting hedge funds. Bloomberg reported:

“Hedge funds are charging exorbitant fees for high-risk and opaque investments” said New York City Public Advocate Tish James. ”Our public employees work hard for their money, and they deserve to know their investments are secure. We can and must invest responsibly and also honor our fiduciary responsibility.”


Last year, NYCERS hedge fund portfolio lost 1.88 percent, lagging both the Standard & Poor’s 500 the Barclays U.S. Aggregate Bond Index. Three-year returns were 2.83 percent.

Eric Sumberg, a spokesman for New York City Comptroller Scott Stringer, didn’t immediately respond to a request for comment.

CalPERS made a similar move last year.


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