Saturday, November 10, 2012

Show-Me State Pension Observer Confirms Our View on Wall Street Battles

Those close followers of this blog know that we have been asking questions of the opponents of defined benefit plans for public employees. There are others asking the same questions, with somewhat similar conclusions to ours.

Take for example an opinion piece in Plan Sponsor by Gary Findlay, the executive director for the Missouri State Employee’s Retirement System (MOSERS).

As any good Show-Me stater would, Findlay asks the question “Who is paying for all this ‘research’?” And by that he means all the claims that defined benefit plans are failed public policy, according to its opponents. Here’s what he says:

For those who are financially or philosophically interested in facilitating the demise of public sector defined benefit plans, the credit crisis of 2008 was made to order. It was a crisis that was just too good to pass up.  While there have always been isolated cases, the volume of anti-defined benefit plan literature that has been generated since 2008 has been staggering.  A good deal of it has been long on hype and short on substance.  The claims being made obviously do not have to be supported by facts and the marching orders seem to be “the more outrageous the better.”  All that is needed is a credible name behind it such as a prestigious university or a think tank with broad name recognition.   

Findlay says the proponents of transparency for public employee retirement systems aren’t very good at practicing it themselves. Indeed, he’s very right on that point.

We know that ALEC, the Heritage Foundation, the American Enterprise Institute and the John and Laura Arnold Foundation are all big proponents of defined contribution plans. Could their backers be those that want the investment management fee income from all those new 401(k) investments that would necessarily be placed in mutual funds? We don’t know because they don’t tell us. There is no transparency on that matter.

It could be that they are the tip of the spear of a clash of titans. Those Wall Street companies with large mutual fund offerings see the assets under management at American public employee pensions and want their slice of the pie. The investment managers can’t have all the fun, in their view. In fact, earlier in his article, Findlay recalls a Wall Street Journal article in 2000:

For years there have been sporadic initiatives to replace defined benefit pension plans with defined contribution plans, but why?  I can offer three trillion reasons – the dollars held in trust by public sector defined benefit plans.  Those responsible for the investment of these assets have done a reasonably good job of keeping management fees down.  If shifted to individual accounts it will be much easier for service providers to increase their fees.  In 2000 there was a major push in Florida to give plan participants the option to participate in an individual account defined contribution plan.  According to an article in the May 5, 2000, edition of the Wall Street Journal, the financial services industry had between 50 and 75 lobbyists lined up Gucci to Gucci prowling the halls of government making their case for the defined contribution option. Does anyone think they were doing this in the interest of the plan participants?  

In the same Wall Street Journal article mentioned, a representative of the American Legislative Exchange Council was quoted as having said the following about public employees: “They see their friends in the private sector doing well in their 401(k)s, and they want the same opportunity.”  That was then but the tides have shifted substantially since the turn of the century.  Now we are hearing that private sector employees have seen their 401(k) balances decimated by the bursting of the tech bubble and the great recession.  Accordingly, public sector employees should be stripped of their defined benefit plans so they can be just as financially ill prepared for retirement as are their private sector counterparts.   Face it – when a private sector employee retires, the employer typically prefers having no further obligation for that employee.  If the retiree runs out of money, it’s not the employer’s problem – it’s the government’s problem.  We have many rules and regulations that prohibit pollution of the physical environment. It’s interesting that corporate pollution of the financial environment has not been addressed in this area.   

In our view, Findlay really does a great job of explaining the dynamics at work. Different, well-heeled portions of Wall Street are battling for market share. Their battle is spilling over in places where it shouldn’t. Like Texas. – Max Patterson

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