Stable Fund Focus in Another Excessive Fee Suit

Link: https://www.napa-net.org/news-info/daily-news/stable-fund-focus-another-excessive-fee-suit#.Y0F5DNPIdlA.linkedin

Excerpt:

The latest excessive fee suit targets “wildly excessive compensation,” an allegedly imprudent stable value offering, and the unmonitored use of “float” income. 

More specifically, the participant-plaintiffs of Miami, Florida-based Lennar Corp. are raising issues with the recordkeeping/administrative fees (“wildly excessive compensation”) paid by the plan, the prudence of retaining Prudential’s stable value fund, and the use of float income by Prudential (the plan’s recordkeeper). 

The lawsuit, filed in the U.S. District Court for the Southern District of Florida (Catenac v. Lennar Corp., S.D. Fla., No. 1:22-cv-23232, complaint 10/5/22), is directed at a plan with approximately $1.2 billion in assets and nearly 13,000 participants. The participant-plaintiffs are represented here by Morgan & Morgan PA.   

Author(s): Nevin E. Adams, JD

Publication Date: 6 Oct 2022

Publication Site: NAPA-net

Editorial: No Crypto in 401(k)s

Link: https://www.toledoblade.com/opinion/editorials/2022/10/08/no-crypto-in-401-k-s/stories/20221004017

Excerpt:

Meanwhile, in Congress the Retirement Savings Modernization Act was just introduced to allow cryptocurrency and just about anything short of lottery tickets into America’s 401(k) accounts. The alternative asset industry — private equity, hedge funds, venture capital, real estate, and more — has been trying for years to offer their speculative products — and reap huge fees in the process — through personal retirement accounts as they are already able to do in some public pensions, such as Ohio’s.

There has been no legal barrier to these investments, and the Trump administration’s Department of Labor went so far as to specify that alternative investments could be part of 401(k)s, a decision affirmed by the Biden Administration. But companies administering 401(k) accounts are fiduciaries, and they’ve avoided alternative investments in fear of getting sued for breach of fiduciary duty for offering them to workers. For decades, prudence has prevailed and 401(k) retirement accounts have not allowed high-fee, illiquid funds as a 401(k) option.

The proposed bill simply states that alternative investments, despite the higher fees associated with them, are “covered” investments that do not establish fiduciary breach by their presence in a 401(k) plan. The cloak of congressionally created cover for alternative investments is needed because the current commonsense assumption is that the mere presence of these investments is strong evidence fiduciary duty has been breached.

Author(s): Blade Editorial Board

Publication Date: 8 Oct 2022

Publication Site: Toledo Blade

Ohio’s Out-of-the-Box Pension

Link: https://www.toledoblade.com/opinion/editorials/2022/09/18/editorial-ohio-out-of-the-box-public-pension/stories/20220914044

Excerpt:

Alarm bells should be ringing about the Ohio Police & Fire Pension following the release of a fiduciary audit of the fund, finished six years after the legal deadline.

Ignoring the law falls on the Ohio Retirement Study Council and their creator, the Ohio General Assembly. But the warnings on investment risk within the OP&F portfolio demand immediate, widespread attention.

The combined pension contribution for police is 31.75 percent of their salary and with firefighters the employer-employee combination is 36.25 percent.

…..

Ohio Police & Fire is “clearly thinking outside the box,” according to Funston Advisory Services. “OP&F is among a very small number of major institutional investors to have adopted a risk parity investment approach across the plan’s entire investment structure,” Funston tells us. Ohio’s police and fire pension is also a pioneer in an investment strategy called “portable alpha.”

In each case, the characteristic that separates OP&F from the rest of the public pension pack is “meaningful use of portfolio leverage.” The Ohio safety forces pension is using one of the riskiest investment strategies in America. The 25 percent of leverage showing on the balance sheet is actually much higher because the alternative investments also include leverage.

The entire portfolio is managed by outside managers, 135 fund managers by our count, who pulled down “mind boggling” fees according to pension expert Richard Ennis. If Mr. Ennis’ name sounds familiar you probably remember he was the expert Ohio turned to for comprehensive analysis of the Coingate scandal at the Ohio Bureau of Workers Compensation. Mr. Ennis gave us an assessment of the OP&F performance over the last 10 years that indicates the pension matched the results of an index fund despite the high fees.

Author(s): The Blade Editorial Board

Publication Date: 18 Sept 2022

Publication Site: The Toledo Blade

How Deceptive Lobbyists Are Exploiting the Goodwill of Public Employees

Link: https://www.governing.com/finance/how-deceptive-lobbyists-are-exploiting-the-goodwill-of-public-employees

Excerpt:

If you followed the saga of the route to passage of the Inflation Reduction Act, you already know that a last-minute maneuver by Arizona Sen. Kyrsten Sinema torpedoed a provision in the Senate compromise bill that would have finally closed the so-called “carried interest loophole.” That’s where savvy real-estate financiers and managers of private partnerships such as hedge funds and private equity deals are able to cut their income taxes as much as 40 percent by masquerading their compensation as a capital gain that enjoys much lower income tax rates.

….

Public pension funds, public employees and their associations need to put a stop to this, and they have both the moral high ground and the clout to do so. It’s high time for political and financial blowback. The PR firms orchestrating this nonsense will just keep it up until their profiteering clients get called out.

….

The reality is that if the fund managers had to pay standard tax rates on their income, it would have zero impact on pension systems’ returns. What are the managers going to do? Cook up fewer deals? Pull up stakes and move to a tax haven? Demand even higher fees on top of their already cushy income? They can huff and puff all they want, but pensioners would lose nothing if the loophole were plugged.

Author(s): Girard Miller

Publication Date: 13 Sept 2022

Publication Site: Governing

7 Democratic Senators Just Did Their Wall Street Donors a Huge Favor

Link: https://jacobin.com/2022/08/democratic-senators-wall-street-donors-private-equity

Excerpt:

In the name of preserving carefully negotiated legislation, Senate Democrats’ leaders united their caucus to vote down amendments that would have added the party’s Medicare expansion plan and expanded child tax credit into the final spending bill now moving through Congress.

That unity, though, was not universally enforced: soon after those votes, seven Democratic senators joined with Republicans to cast a pivotal vote shielding their private equity donors from a new corporate minimum tax.

The seven Democrats who joined the GOP to give private equity firms that $35 billion gift were: Senators Kyrsten Sinema and Mark Kelly of Arizona, Raphael Warnock and Jon Ossoff of Georgia, Jacky Rosen and Catherine Cortez Masto of Nevada, and Maggie Hassan of New Hampshire.

Five of the seven Democrats are among the Senate’s top recipients of campaign donations from private equity donors, according to data from OpenSecrets. The group collectively raked in more than $1.4 million of campaign cash from the private equity industry, which has become a huge source of capital for the fossil fuel conglomerates that are creating the climate crisis.

The contrast between voting to protect private equity donors and voting against programs for the working class effectively screamed the quiet part out loud about whom senators typically respond to — and whom they don’t.

In this case, Democratic and Republican senators responded to the demands of an industry that has not only spent more than a quarter billion dollars on the last two federal elections, but that also employs an army of government-officials-turned-lobbyists to influence lawmakers in Washington. The world’s largest private equity firm is headed by one of the Republican Party’s largest donors, and now employs the son-in-law of Senate majority leader Chuck Schumer as a lobbyist.

That influence machine is fueled by $6.3 trillion industry’s profits, generated by collecting massive fees off investments by public pensions and other institutional investors. Those fees have ballooned even when the industry often provides poorer returns than the stock market. Cloaked in secrecy, the industry invests in Medicare and health care privatization, as well as virulently anti-union and fossil fuel companies.

Author(s): David Sirota

Publication Date: 10 Aug 2022

Publication Site: Jacobin

Wrong Way CalPERS Increased Private Equity Allocation by Over 50% as Investors Are Dumping Holdings

Link: https://www.nakedcapitalism.com/2022/08/wrong-way-calpers-increased-private-equity-allocation-by-over-50-as-investors-are-dumping-holdings.html

Excerpt:

CalPERS is so reliably bad at market timing that the giant fund serves as a counter indicators. Last fall, CalPERS increased its allocation to private equity from 8% of its total portfolio to 13%, which is an increase of over 50%. This is after this humble blog, regularly citing top independent experts, pointed out that the investment raison d’etre for private equity had vanished in the 2006-2008 time frame, not once, but many many times as various studies kept confirming that finding. Not only did private equity no longer earn enough to compensate for its much higher risks (leverage and illiquidity) but it was no longer beating straight up large cap equities.

Now there is a way out of this conundrum: to bring private equity in house. Private equity fees and costs are so egregious (an estimated 7% per annum) that even a bit of underperformance relative to private equity indexes will be more than offset by greatly lower fees. A simpler option would be public market replication of private equity.

But the dogged way funds like CalPERS stick to private equity points to rank corruption, of the sort that landed CalPERS former CEO Fred Buenrostro in Federal prison for four and a half years.

…..

Another problem is cash flow management. Private equity funds do not take investor money at closing. Instead, investors get “capital calls” to pony up part of their commitment to the fund so the fund manager can buy a company. These capital calls require the dough to be sent as specified in the offering memorandum, usually in five to ten days. The consequences of missing a capital call are draconian. The fund manager can seize all the investments made so far and distribute them to the other limited partners.

In the financial crisis, CalPERS had too little cash on hand to meet private equity capital calls. It wound up dumping stocks at distressed prices to satisfy the private equity demands. So the risk outlined below is real.

Author(s): Yves Smith

Publication Date: 9 Aug 2022

Publication Site: naked capitalism

Wall Street Is Fleecing a Bunch of Teachers

Link: https://jacobin.com/2022/04/katie-muth-pennpsers-pensions-retirement-fund-teachers-sec-pennsylvania

Excerpt:

A new era in the decade-long battle by retirees and whistleblowers to halt massive transfers of wealth out of retirement funds and into Wall Street firms could be at hand, thanks to the case of Katie Muth.

Muth, a Democratic Pennsylvania state senator, is one of fifteen trustees who oversees Pennsylvania’s largest public pension fund, the Pennsylvania Public School Employees’ Retirement System (PennPSERS). Not long after her February 2021 appointment to the board, Muth began questioning the fund’s investments in areas like private equity, hedge funds, and real estate.

Over the past thirty years, public pension funds have moved $1.4 trillion of retiree savings into such high-risk, high-fee “alternative investments,” enriching finance industry moguls like Stephen Schwarzman of the Blackstone Group and Robert Mercer of Renaissance Technologies while often shortchanging retired public employees and teachers.

But Muth says that when she asked the fund’s investment staff for more information about its high-risk investments, she was rebuffed — so in June 2021, she sued the fund for basic information about its investments.

Author(s):MATTHEW CUNNINGHAM-COOK

Publication Date: 6 April 2022

Publication Site: Jacobin

The private equity industry in the new interest rate environment

Link: https://voxeu.org/article/private-equity-industry-new-interest-rate-environment

Graphic:

Excerpt:

First, the illiquid and long-term nature of the private equity asset class, significant dispersion in returns across funds, as well as bilateral and relationship-driven fundraising, creates scarcity in access to individual funds, giving private equity funds the bargaining power when splitting the returns. As the industry’s growth deaccelerates, the pendulum of bargaining power will start to shift to limited partners, but more permanently than what we saw during the GFC. 

Second, we will see larger scrutiny of the cost structure and the industry’s value-add. Put simply, it is an expensive asset class, with the net returns to limited partners lacking consistency in beating public benchmarks (e.g. Harris et al. 2014).3 A central tension is large funds’ management fees, which typically run at 1.5% to 2% of committed capital already in the first five years of the fund life.4 This structure is lucrative for managers but underscores the disconnect between the private equity firm’s income stream and its fund performance, especially for large funds. 

Third, such pressures would make new and smaller funds particularly vulnerable. The proliferation of new funds, especially generalists’ funds, in the past decade was partly explained by the strength of capital flow and investment managers’ desire to capture a more significant share of fund economics. These funds have a higher embedded cost structure. Larger funds, therefore, have more room to compress the fees and have a higher ability to experiment in the investment space. All this gives larger-scale firms a better chance to withstand adverse pressures, resulting in market consolidation.

Author(s): Victoria Ivashina

Publication Date: 24 Feb 2022

Publication Site: VoxEU

Suggested reforms for Pennsylvania’s Public School Employees’ Retirement System

Link:https://reason.org/commentary/suggested-reforms-for-the-pennsylvania-teacher-pension-system/?utm_medium=email

Graphic:

Excerpt:

Despite realizing excellent investment returns in 2021, industry capital market forecasts continue to suggest persistently volatile near-term investment returns that stand to only add to over $1 trillion in current pension funding shortfalls. Most near-term investment outlooks we’ve seen from pension boards across the country predict anywhere from a 6.0 percent-6.3 percent return over the next 10 years. PSERS’ assumed rate of return was recently lowered and currently sits at 7 percent.*

PSERS’s investment outlook is similar to these broad projections. Figures 1 and 2 present the results of the Monte Carlo simulation analysis developed by the Pension Integrity Project. This iterative analysis uses 10,000 simulations of PSERS’s asset performance over 20 years, considering expected returns and volatilities of plan assets, to generate both probabilities of hitting certain returns and expected return distributions.

These findings suggest that PSERS is not likely to achieve even a 6 percent average return over the next 10-15 years—much less its current assumed return of 7 percent. This suggests there is a high probability that the public pension plan’s unfunded liabilities could get worse, not better, in the near-to-mid term. This underperformance—relative to the plan’s own return rate assumptions—will make the system’s long-term solvency challenges even larger.

Author(s): Jordan Campbell, Ryan Frost

Publication Date: 11 Oct 2021

Publication Site: Reason

SEC Set to Lower Massive Boom on Private Equity Industry

Link:https://www.nakedcapitalism.com/2022/02/sec-set-to-lower-massive-boom-on-private-equity-industry.html

Excerpt:

In a matter of fact, understated manner, the SEC document makes clear that its enforcement regime has not succeeded in getting private equity fund managers to stop or at least considerably reduce their abuses. Recall that in 2014, then enforcement chief Andrew Bowden gave a peculiarly titled speech, Spreading Sunshine in Private Equity. The SEC has just started its initial examinations of private equity firms. Bowden said that the SEC had found serious abuses in more than half of the firms examines, including what in other circles would be called embezzlement. Bowden also said if anything the misconduct was more prevalent at the biggest firms, which was the reverse of what it found in other areas it regulated, where the crooked operators were normally boiler-room level.

This promising start quickly fizzled out. Yes, the SEC did engage in a series of enforcements actions, targeting common abuses like charging “termination of monitoring fees” which had never been contemplated in the fund agreements, and hauling up big name firms like Apollo, KKR, and Blackstone. However, this amounted to enforcement theater. The SEC acted as if “one and done,” citing particular firms for an isolated abuse, when all the big players were certain to have engaged in many others, and then acting as if everyone would shape up, was either craven or willfully blind. Bowden immediately turned to giving speeches on how private equity firms were obviously upstanding and wanted to do right. He then gave a speech at Stanford at a private equity conference where went on far too long about how he wanted his son to work in private equity and an audience member immediately said he wanted to hire him. Bowden left the agency in three weeks.

This SEC letter, by contrast, makes clear that the agency has ample evidence in its files of continued abuses by private equity fund managers. It does not mention a particularly egregious general strategy: of admitting in the annual disclosure documents, the Form ADV, that the private equity fund managers are violating their contracts with investors. Admitting a contractual violation does not cure it, but the private equity barons appear to believe they can create their own alternative reality. And until Gensler showed up, that belief looked to be correct.

Author(s): Yves Smith

Publication Date: 10 Feb 2022

Publication Site: naked capitalism

Maryland is wasting its pensioners’ money

Link:https://www.washingtonpost.com/opinions/2022/02/04/maryland-is-wasting-its-pensioners-money/

Excerpt:

Seven hundred and forty-four million dollars. That is the amount of Wall Street fees paid by the Maryland state pension plan for investment advice in fiscal 2021.

Over the past 10 years, the fees totaled roughly $4.5 billion, or about 15 percent of the plan’s earnings. For that kind of money, you would think the state gets only the prime stock and bond picks from its advisers, but, during that time, Maryland, as with most other states, failed to beat the returns of a simple 60 percent stocks/40 percent bonds index. Many large institutional investors, including public pension plans, use this 60/40 index as a barometer to gauge their portfolios’ results. They structure their portfolios to avoid a 100 percent exposure to the sometimes volatile stock market. If their results are better than the index for a given year, they claim success. Many mutual funds attract smaller individual retail and 401(k) retirement accounts by copying the index and charging low fees for passive management.

….

This drainage damages the financial security of public workers in Maryland and other states, and it forces greater taxpayer contributions to the plans. The ongoing situation has a secondary effect as well: The massive wealth transfer — from public workers and average taxpayers — to a small coterie of Wall Street money managers fosters a new plutocracy, successful at obscuring the problem and blocking reform.

The obvious fix for public plans is to shift from expensive fee investments to low-fee indexing, a tactic endorsed by none other than Warren Buffett, the noted value investor and philanthropist. For large public plans, including Maryland’s, this shift, if implemented, would be gradual. Extricating the fund from its long-term contractual commitments and replacing them with passive investments is going to take time.

Author(s): Jeff Hooke

Publication Date: 4 Feb 2022

Publication Site: Washington Post

A Group of Midwestern Retirees Are Trying to Stop Wall Street’s Abuse of Retirement Funds

Link:https://jacobinmag.com/2021/11/ohio-teacher-pensions-hedge-funds-private-equity-strs

Excerpt:

Due to an active group of retirees and the assistance of a former Ohio attorney general, both the Ohio state auditor and the Ohio Department of Securities have launched inquiries into the Ohio State Teachers Retirement System (STRS Ohio), a $100 billion pension that has launched billions of dollars of investments into the riskier corners of the market, namely private equity and hedge funds.

“Ohio could be the first place where the secrecy surrounding public pensions and their investments in risky, speculative, and high-fee investment vehicles could be looked at in a serious way,” said Ted Siedle, a former SEC attorney and longtime pension whistleblower.

Pointing out that pension funds across the country have routinely invoked “trade secrets” exemptions to deny the public information about investment performance and fees, Siedle said the actions taken by the state auditor and securities commissioner “could be the beginning of the end” of such secrecy — not just in Ohio, but nationwide.

Author(s): MATTHEW CUNNINGHAM-COOK

Publication Date: 30 Nov 2021

Publication Site: Jacobin magazine