AB 190 is hitting the light of day [ltn] – and for those advocates of middle class financial security and adequate pensions for former public employees this bill needs to go back down into its pit. This bill is a bit of ALEC dreamland:
“…relating to public employees’ retirement; providing for the establishment of a hybrid retirement program for certain public employees; requiring the program to include a defined benefit plan and a defined contribution plan; setting forth the required provisions of each plan; requiring certain public employers under certain circumstances to make additional contributions to the Public Employees’ Retirement System to reduce the unfunded liability of the System;…[ NVLeg]
The Hybrid From Hell
This portion of the bill would create a system similar to the one enacted in Utah, and promoted by ALEC in its “State Solutions for Government Pension Reform.” [ALEC pdf] *See Utah Reform, page 18.
There are a couple of crucial point embedded in the ALEC publication. First is the notion that defined benefit plans are a “problem.” It doesn’t matter the fiscal state of the pension benefits program – if it isn’t about to send the state into bankruptcy, there are ways to massage the statistics in order to make it appear the state has a monstrous unfunded liability. Funding from the Koch Brothers partially funds the NPRI’s conclusion that there is a $41 billion current liability. And, gee whiz – wouldn’t you have guessed it? – they recommend a Utah style hybrid public pension program. *See DB 12/9/14.
Before grabbing the children and heading for the hills in a panic – consider the possibility that we can make the unfunded liability number really big by reducing the advance funding factors. Translation, if I were to total up the liability for every public employee, working and retired, and treat it as if it were all going to be paid out tomorrow morning, the number would be really big – and really misleading and inaccurate.
What we need to focus on is how well the program deals with liabilities over time. So, when AonHewitt did an independent review of the NV PERS system what did it find?
“AonHewitt found that NV PERS “funding levels and the discount rates were not uncommon, where NV PERS differs from others is in its Funding Policy and contribution rules which provide much better than average protection, when compared to similar systems. Continued review and comparisons of costs and benefits with other large plans, actuarial audits, and consistent updating of the Funding Policy facilitates NVPERS ability to remain among the best run large public systems.” [AonHewitt pdf]
Sorry, privatizers and financialists, there really is no reason to adopt any major changes in the current define benefit plan in Nevada because, as the independent comparative review discerned, Nevada doesn’t have the problems associated with other large pension systems in some other states.
There’s Gold In Those Hills (for Someone)
Thus far, ultra-right organizations such as ALEC and associated think tanks like the NPRI have been beating their drums and issuing reports to friendly news outlets about the Problem – which doesn’t exist in Nevada, in the hopes of promoting ALEC’s agenda that brings us to the second major point of the issue:
ALEC, et. al., want to promote defined contribution plans because there’s money to be made.
“On the private side – Continue to tell workers that they’ll be better off with their “economic freedom” (in a defined contribution plan) to finance their own retirement plans with “flexibility,” and they can use their money as they want – just make the management fee structure so complicated it takes a degree in Finance to figure it out, and then operate on the happy assumption that the financial professional’s first duty is to his own firm’s bottom line not with a specific obligation to cover the future retiree’s bottom. Give us your money, pay us the fees, and just trust us! Go quietly, and no one will get hurt?” [DB]
AB 190 is a classic assault on a perfectly good public retirement system which is NOT generating an unwieldy unfunded liability. If the ultimate purpose isn’t to retain the best features of the current system, but to replace it with defined contributions in the future, then the other motive which springs to mind is that the financialists among us have been ogling the coffers of public employee retirement systems and want very much to dip into them up to at least their elbows, if not their shoulders.
What the advocates of AB 190 want to do is fairly easy to see – ultimately hand over wads of money from the public employees retirement funds to wealth management firms who will exact their fees and transactional costs with less public scrutiny than is required in a publicly managed retirement system. What could possibly go wrong?
Golden Years or Fleeced Sheep?
Not sure this is the case? Then look at the provision in the bill in which individual trust accounts are inserted. [NV Leg pdf Section 4] Let’s review two problems associated with the individual trust accounts. First, how many people have the financial training, experience, or acumen to manage their own trust accounts? The obvious answer is – not many.
In this instance a newly hired heavy equipment operator for NDOT might be given his “freedom” to establish an individual retirement trust account. This freedom has a price tag. There will be transactional and management fees associated with this account. There will be transactional decisions made about the portfolio and contents of the account. If the basis for the transactional decisions is “proprietary” information within the wealth management firm handling the account, then how is the NDOT employee to determine if the transactions were made in his or her best interests?
This brings us to the second problem, not only do many public employees (or other regular folks for that matter) lack the financial expertise to track their own individual retirement trust accounts, but if the system isn’t very carefully structured, and the contracts exceedingly open – the employee may not be able to find out how and why investment decisions were made on his or her behalf. However, the wealth management firms will be delighted.
Half of the Research is false, ergo Half the Products are false
If these two problems aren’t enough to may a person queasy, there’s one more issue to explore. Financial firms are happy to inform investors that their investment decisions are based on empirical research. Sounds nice, doesn’t it? Wait. Evaluating trading strategies has proven to be a mare’s nest of research forms, leading the Journal of Portfolio Management to report that, “Most of the empirical research in finance, whether published in academic journals or put into production as an active trading strategy by an investment manager, is likely false. This implies that half the financial products (promising outperformance) that companies are selling to clients are false.” [Economist]
Do the advocates of AB 190 comprehend what the JPM author’s are saying when they conclude that:
“In summary, the message of our research is simple. Researchers in finance, whether practitioners or academics, need to realize that they will find seemingly successful trading strategies by chance. We can no longer use the traditional tools of statistical analysis that assume that no one has looked at the data before and there is only a single strategy tried. A multiple-testing framework offers help in reducing the number of false strategies adapted by firms. Two sigma is no longer an appropriate benchmark for evaluating trading strategies.” [JPM]
Let’s translate: If there is a 50-50 chance that the research is wrong, then there’s a 50-50 chance the financial product sold on the basis of that research will be falsely assumed to be a good product to put in a retirement portfolio. How is our NDOT equipment operator, our public school teacher, our firefighter, our police officer, our assistant county administrator, our receptionist in the Department of Education, supposed to track his or her retirement account IF the research isn’t made available, and if it is, it might very well be inaccurate?
We might revert to the previous advice from the management firm – give us your money, don’t ask too many questions, go quietly, and no one will get hurt – in this firm. You, might be another matter.