Pension Plans Must be Overseen by Real Investment Fiduciaries

Jeannie Kaplan, a member of the board of education of the City of Denver, explains that when she reviewed and approved a complicated financial transaction on behalf of the Denver teachers’ pension plan, “I sat there wanting to believe what they (Mssrs Bennet and Boasberg, respecitively, the superintendent and chief operation officer of the school system) were saying”.  This was Ms. Kaplan’s way of addressing a $400 million hole in the pension plan and assessing JP Morgan Chase’s proposed solution.

In retrospect she concludes, “The board probably should have had their own financial consultant.”

This revelation is buried deep in Gretchen Morgenson’s article, Exotic Deals Put Denver Schools Deeper in Debt, on the front page of today’s NY Times.  In great detail, Morgenson outlines the deal which the Denver public school system entered into with JP Morgan in order to address the $400 million dollar underfunding of the system’s pension plan. Not surprisingly the terms of the deal (for Denver) have turned south and are going to be costly.  Again, not surprisingly, it will likely turn out to be a rich deal for JP Morgan Chase.

Ms. Kaplan’s statements reveal a dark secret about the $ trillions held by private and public pension funds.  Many (and I would venture the vast majority) are overseen by people with little investment experience and knowledge.  In all likelihood, a review of the transaction by financial consultants would not have produced a different result.  My suspicion is that Ms. Kaplan and her colleagues would have rubber stamped the recommendations made by a consultant in the same way they rubber stamped the recommendations of Bennet and Boasberg.

Would Ms. Kaplan have asked a consultant penetrating questions about the assumptions, potential conflicts of interest or risks inherent in the transaction?  Probably not.  Because the chances are that Ms. Kaplan wouldn’t even know where to begin in asking these questions.

This is the shocking truth.  Many people serve as pension plan fiduciaries who do not even possess a rudimentary understanding of investment and financial principles.

Quite frankly, the participants in the Denver plan, along with the taxpayers deserve far better.  They deserve real fiduciary experts who understand the complexities of managing and overseeing pension plans.  Experts adept in assessing risk, prudent portfolio construction and monitoring various service providers to the plan.

Wall Street professionals are very smart and creative.  Probably much smarter on financial and investment matters than Ms. Kaplan and her colleagues.  Pension plans need fiduciaries who are an equal match to Wall Street.  I’m not suggesting, at all, that everyone on Wall Street is pedaling a scam transaction.  In fact, many Wall Street innovations have proven beneficial to markets and investors.

Instead, fiduciaries, acting on behalf of plan participants need to assess the risks they are assuming on behalf of the plans and assure that the plans are being properly compensated for these risks.  No doubt, any deal proposed by Wall Street, will be good for Wall Street.   Plan fiduciaries need to make sure that the deal is also good for the plan.

There is nothing to cause me to doubt Ms. Kaplan’s capabilities as an effective school board member.  However, she, and countless others, should recognize the limitations of the their skills and delegate their investment responsibilities to experts.  I’m not suggestion that they simply rely upon and rubber stamp recommendations by consultants, but rather delegate responsibility to those who will stand by the fiduciary decisions which they make on behalf of the plan participants.

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