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Friday, January 15, 2016

If you don't understand how lucky you are to have them taking care of your retirement, PSPRS has a guy to help paint a picture for you

If you were not aware,  those social media-savvy pros responsible for our retirements have both a Twitter account and a Facebook page.  Check them out if you'd like, unless, of course, you're expecting any updates on things that might interest, concern, or affect you.  The last relevant tweet dates back to August 2015, and the last post on the Facebook page dates back to May 2015.  However, I did find a link on their Twitter account to this opinion piece by Grant Wood, "Why Millenial should care about retirement security," that was published in the December 15, 2015 Arizona Capitol Times.

Normally I would not feel compelled to comment on such a silly piece, but PSPRS thought highly enough of it to share it with its 40 followers.  This is despite the fact that Mr. Wood's primary contention about defined benefit pensions is false:
Defined benefit pension plans like ASRS provide a much more secure retirement plan as they don’t rely on the stock market for their success the way defined contribution plans, or 401Ks, do.
He writes about his retired public employee grandparents who are now safe and secure with their Arizona State Retirement System (ASRS) benefits.  He ends his piece with what is meant to be a rallying cry to fight the moneyed interests he feels are trying to destroy the futures of people like his grandparents:
Wall Street interests will continue to attack public pensions this coming year as they have been for so many to switch employees out of defined benefit public pension systems and into defined contribution 401Ks, where they make the money.
Attempts like this, and similar to Proposition 487 in 2014, to switch new or current employees into defined contribution systems and out of stable defined benefit systems like ASRS threaten secure systems and can cost taxpayers millions. I won’t let this happen to my family and will stand to protect ASRS and public pensions in my state. Will you?
At 23 years old with his new college degree, Mr. Wood seems full of righteous passion to make the world a better place, which no one should discourage, and it is not my intention to mock or criticize him. However, as his elder I have a responsibility to pull him back to reality.  I can start by directing him to ASRS' asset allocation page, which shows where it invests and earns the income to pay his grandparents' benefits.  Here is ASRS' portfolio breakdown:

US Equity 26%
Non-US Equity 24%
Private Equity 8%
US Fixed Income 15%
Private Debt 10%
Real Estate 10%
Commodities 2%

So defined benefit pensions don't rely on the stock market?  Not according to ASRS, which is half invested in equity markets.  Furthermore, all the investments require the use of Wall Street firms to facilitate investment in the various asset classes.

I will give Mr. Wood more credence for his argument that Wall Street would prefer savers to be in defined contribution (DC) pensions versus defined benefit (DB) pensions.  This is because fees tend to be higher in DC pensions.  This excellent brief from the Center for Retirement Research (CRR) at Boston College gives an excellent comparison of DB and DC plans as well as good information on fees. Lower fees for DB plans are most likely due to economies of scale.  A large investor like ASRS or PSPRS can bargain and shop around for lower management fees.  The individual investor cannot and is stuck with whatever investment firm(s) his employer chooses to manage the employer's DC plan.  So, there is something to Mr. Woods' argument, but let's look more closely at what Wall Street makes off DB pensions.

PSPRS, my not-so-stable pension, earned 4.21%, gross of fees, last fiscal year.  Net of fees, PSPRS earned 3.68%, so 0.53% was paid in management fees.  According to the 2015 annual report, PSPRS paid a total of $129.1 million to various asset managers.  We should keep in mind that was what Wall Street managers earned from just a single pension plan in Arizona, which is not even the largest in the state.  The aforementioned CRR brief says that the median index equity fund has a fee of 0.44% and the median bond fund is 0.86%.  An 80/20 mix of stocks/bonds would give an annual fee to a DC pension investor of 0.524%, comparable to what PSPRS paid out in fees for its portfolio, albeit one that is much more complex.  Regardless, if we work off the premise that individual DC pension investors should allocate their money in low-fee index funds, as many financial advisers recommend, this is a fair comparison and shows that disciplined, long-term DC investors can pay fees close to what DB pension managers pay to invest for them.

However, the key point Mr. Wood misses is the real allure DB pensions have for Wall Street and why they would never want them to be eliminated.  DB pensions bring in billions of dollars that are held captive by entities out of the control of the individual whose retirement they are meant to fund.  If DB pensions were eliminated, those dollars would revert back to the individuals and employers with no guarantee that they would then be placed entirely into DC pensions since there is no legal requirement to contribute to your own retirement, except for Social Security, which Wall Street cannot touch.  What percentage of those billions in DB pension contributions would voluntarily end up in DC pensions is open to speculation, but it would certainly not be 100%.  I would guess that it would be drastically less.  How much captive money would Wall Street be willing to give up from DB pensions in order to possibly make more in fees from voluntary DC pensions.

Employees contributed about $215 million to the combined plans managed by PSPRS last fiscal year.  Employers contributed about $547 million.  If employees put 70% of these DB contributions into a DC plan, and employers matched that 100%, only $301 million would go to Wall Street to invest versus $762 million.  I think they would rather take the sure thing provided by DB pensions than risk employees and employers spending that otherwise captive money on other things.  After all, they don't care whether anyone or any organization makes money, only that they get their cut (or vig, as the case may be), which they cannot get if the money is not placed with them in the first place.  Ideally, they would probably like both DB and DC pensions to be as large as possible.  The more the merrier, but I think in the end their preference would be for DB pensions over DC pensions.

Defined benefit pensions are a mess today because of the ignorance and naivete expressed by Mr. Wood in his opinion piece.  Defined benefit pensions do not magically produce retirement income.  They have to follow the laws of finance and have to be managed with the overriding principle that anything you promise for the future has to be paid for in advance.  If not, taxpayers and future employees are stuck with the unpaid bill.  Mr. Wood can be thankful that his  grandparents are members of ASRS, a pension system much better managed than PSPRS, and can enjoy their well-earned retirement without the anxiety PSPRS members are having to deal with now.

If Mr. Wood wants to get involved, he should acknowledge and work to prevent the same errors, borne of greed, selfishness, and ignorance, that have so crippled DB pensions.  Perhaps he could work to find out how to consolidate the DC plans throughout the state so that they can lower fees for members.  For example why does the City of Tucson, Pima County, Pima Community College, the University of Arizona, and even Raytheon for that matter, each have their own DC plan?  Wouldn't it be better for them negotiate as one large group with Fidelity, ICMA, Nationwide, TIAA-CREF, et al. and get the lowest  fees for their members and the best investment options and advice.  That's how you fight Wall Street.

If you check out the ASRS Twitter page, you will see that it is more professional and informative than PSPRS'.  I did not find a link to Mr. Wood's opinion piece on the ASRS page, though there were links relevant to millennials about financial resolutions, job interviews, and student debt.  Even though this was a discussion about Mr. Wood's piece, this is ultimately about PSPRS.  PSPRS continually boasts about its "successful" investment strategy, a strategy that is heavily dependent on multitudes of outside investment managers.  Yet they link to a cynical opinion piece that is meant to incite readers' anger against the same Wall Street firms that have earned millions off pensions like PSPRS.  To what end?  So that someone just out of college can remind all of us rubes how lucky we are to have PSPRS protecting us from Wall Street's predations? How they are protecting us from investments like the Fidelity Spartan 500 Index Fund (FUSEX), which has an annualized return of 9.93% over the last 28 years and an expense ratio of only 0.1% or the Fidelity Spartan Bond Index Fund (FBIDX), which has an annualized return of 6.24% over the past 26 years and an expense ratio of only 0.22%?

PSPRS' Twitter page is practically bereft of any useful information to PSPRS members or the public and the few tweets available are mostly inane or self-serving.  A professional and informative Twitter page befits a professional and member-focused organization like ASRS.  PSPRS' Twitter page is inane, cynical, and self-serving.  Readers can reach their own conclusions about what kind of organization PSPRS is.

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