Tuesday, January 22, 2013

County Pension System Risks vs 401

The U-T has a great article on changes in the portfolio mix of the San Diego County employee pension fund.  In 2009, the county fired the fund manager after losses totaling $2 billion in 2008.  Assuming that the fund had about $9 billion at the time, that is a loss of 22%, compared withan an S&P loss of 37% for the same year.  Taken in context that doesn't seem that bad.  The new fund managers have shifted the mix to include emerging market debt (Russia, Brazil and Mexico) as well as in hedge funds.  I find the 2 basis point (2%) management fee in the new contract to be too high.  Fees are a drag on performance, and frankly, the county should be shooting for something closer to 1%.   Correction: A commenter on sdrostra pointed out that two basis points is .02%, not 2%. I should have checked the math. The fees compare favorably with the Federal Government's Thrift Savings Plan.   I wouldn't mind hearing from any professional financial planners on this subject.  I am not qualified to say whether the investment strategy is good or not, I just know that above average returns generally do not prevail.

Which brings me to my main arguments for 401 style pensions. Inevitably, these fund managers are going to have a bad year, no matter how well they are doing now, and taxpayers will foot the bill.  The entire system is rigged so that the taxpayer shoulders all the risk, but the fund manager and employee beneficiaries are guaranteed their pay days.  Further, as we have seen with CalPERS pensions, which invested $500 million in green energy in 2010, investments can be influenced by political considerations, again to the detriment of the taxpayers, who are on the hook for losses.

However, under a 401style plan, employees shoulder the risk, but they can adjust their individual pension risk to their personal situation, shifting more to bonds as they approach retirement, for example.  Further, they can protect themselves by managing their own investments and avoiding high fee management firms.  This way taxpayers are protected and employees can be as well.  The counter-argument is that individual employees may not invest wisely, but I think that is changing as financial literacy is more common in the general population.  Should taxpayers take all the risk just because some employees will be foolish?  Further, the union could do an actual service to the employees by providing them with sources of financial advice.

Vocabulary clarification, I use the term 401 style, because government employee defined contribution plans are considered 401(a) plans, not 401(k) which are private sector plans.


  1. Fund managers may face restrictions which individuals do not face when it comes to allocation percentages. So, a fund manager may only be allowed to put 5% of funds into a great investment where a 401 holder might put 50% into a winning investment.

  2. It's 2 bps per quarter, so 8 bps per year. But that's just what Partridge/Salient skims off the top for picking the managers.

    The bulk of the expense ratio is in the fees to the overpriced hedge fund managers Partridge picks.

  3. As the wife of a cop, I also want 401K's so we can pick up and change departments if we want to...more competition and flexibility. Pensions chain you to a city or company.