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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