Being a former public school teacher for twenty years, I know how God-awful the average 403(b) plan can be. Now comes the not so stunning revelation…the state- run pension plans can be even more diabolical!
Rhode Island teachers have called upon both the S.E.C. and F.B.I. to investigate some very serious allegations. Several hedge funds are being accused of siphoning off teachers’ pension money into their own pockets and those of their most favored clients.
The Rhode Island Teachers Association has accused these firms of using discriminating “side letters.” These letters would allow certain “favored” clients access to nonpublic information, lower fees, and special rights to withdraw money ahead of other investors. Take a wild guess: Who does not fall under this “favored” status?
Amazingly, these funds say there is legal precedent which exempts them from notifying all investors of their side letters to their most favored clients. These actions seem to fit a familiar pattern in regard to teachers’ retirement funds.
Huge conflicts of interests, a complete lack of transparency, and egregious fees seem to plague the retirement plans of our nation’s public school teachers.
Like many 403(b) plans, teachers’ pension plans are often wrought with conflicts of interest. In Rhode Island, current Governor Gina Raimondo arranged to have 25% of the teachers’ pension fund invested in so-called “alternative investments.” She made this decision when she was the State Treasurer.
These types of investments are often complicated, have very high fees, and usually underperform simple market indices on both a relative and a risk-adjusted basis. There is something more troubling about the Rhode Island fiasco. Governor Raimondo maintains an ownership stake in a firm that manages some of this money.
Similar to high-fee variable annuities, which comprise a sizable part of the 403(b) landscape, hedge and private equity funds are often illiquid. This means there is no access to the funds when they are needed most.
If a teacher pays an extortion fee (I mean, “surrender fee”) to the insurance company, they may gain access to their own 403(b) money. Hedge funds actually put up “gates.” This means pension money may be trapped for an extended period of time; not exactly an ideal situation to generate income to fund a pension!
To make a bad situation worse, favored investors have the ability to exit stage left during bouts of market chaos. The funds of retired teachers in Rhode Island do not. This is kind of like living in an apartment where favored tenants have fire escapes while other families living in the same building do not, but pay more in rent! Where else could rules like this be allowed to exist?
Many teachers are stuck with high-priced underperforming mutual funds and variable annuities in their 403(b) plans. It seems a good portion of the money set aside for their state pensions are afflicted with same high-fee plague.
According to David Sirota, “Since 2011, Rhode Island’s $1.2 billion hedge fund portfolio has overall generated $140 million in fees for hedge fund firms, while delivering returns that have significantly trailed traditional low-fee index funds.” The defense rests its case.
Many of the hedge funds that manage teachers’ pension accounts consider this “dumb money.” Often state officials have limited financial acumen and they become easy marks for slick hedge fund salespeople. In effect, teachers’ pension money often becomes cannon fodder to augment the returns of a select, privileged few.
Teachers in Rhode Island are paying a steep price for all of these transgressions. This has included a round of pension cuts for current retirees.
The national implications are even more ominous for teachers. Many educators are currently being gouged in their 403(b) plans. This pandemic has now infected their more valuable pension benefits.
Dual legislation is needed to reform both the wild west of 403(b) plans and the encroaching hedge fund menace in their state pension accounts.
Don’t hold your breath waiting for the cavalry to arrive. It is very difficult to make legislative reform when the lawmakers themselves are part of the problem.
Along with Governor Raimondo of Rhode Island, Governors Christie of New Jersey and Rauner of Illinois all have some explaining to do regarding the role of high-fee investments in state pension funds.
The proposed D.O.L. rule requiring advisors to take on fiduciary responsibility for individual retirement accounts could serve as a template for the horribly conflicted teachers’ retirement morass.
While this is a common sense solution, the probability major reform will happen any time soon is low. There are too many greedy hands looking to get their piece of this “dumb money.”
Many politicians and Wall Street honchos are connected at the hip on this issue. They will not give up this gravy train without a fight. Lawmakers’ political contributions and hedge fund managers’ astronomical compensation packages depend on this unholy alliance.
There is something very un-American about a school secretary being taxed at a higher rate than a hedge fund manager living in a mansion in Greenwich, Connecticut.
Being a former history teacher, looking back into the past may find a solution to this modern Gilded Age issue.
Where is Teddy Roosevelt when we really need him?
