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.

California Looking for New Ways to Steal Worker's Money

Well, that's not what Jerry Brown and legislative Democrats claim their bill would do, but how can we doubt that wouldn't be the effect.  Here is what they are claiming, as reported in the SacBee:

The goal is to create a savings program in which workers who have no access to a pension can count on a guaranteed rate of return for contributing about 3 percent of their salary.

Sounds laudable? But who will control the money? Who will guarantee the rate of return?  According to the article, private insurers would, because:

Money would be pooled in a state-administered fund that would be professionally and conservatively managed and invested. 

So why should anyway be nervous. All those billions will be tucked away safely in the care of the state. The governor wants to make sure that the money is safely managed by his cronies appointees.

Before committing himself to the concept, Brown sought and received the requirements placed in SB 923 – that lawmakers take a final vote before implementation and that a board overseeing the program be increased from seven to nine members, five of whom would be gubernatorial appointees or officials of his administration. 

That reassures me. And the record of CalPers in managing pension benefits for state employees has been so sterling, with 99% of private funds outperforming it, I don't see why private businesses are having misgivings.

My immediate suspicion when I read this news is that the state intends to commingle these funds with the state pension monies.  The Appeal-Democrat reports that Kevin De Léon, the main sponsor of the bill, has previously gone on record for calling for all private sector workers to be folded into CalPers. Might this be step one, and the next step taken under the disguise of "efficiency?" Of course it will. The state Democrats are determined to drive every private business out of the state. I wonder who they think will pay the taxes to pay for their hare-brained schemes.