Why California Is Wrong To Believe That Our Pension Problems Will Be Solved By A Move To Defined Contribution Plans
If you listen closely to the politics of the day you might hear that many of our budget problems would be solved by a simple switch from Defined Benefit (DB) plans to Defined Contribution (DC) plans. Not true.
The problem isn't with our pension plans, it is with our politicians promising what cannot be delivered. But aside from that it would be irresponsible to move our public employees (even "just" future employees) to DC only plans. Why? Because we would be throwing them to the wolves.
You see, in California and many states around the country public employees do not enjoy the same protections that private employees receive when it comes to Defined Contribution plans (403(b) and 457(b)). Government defined contribution plans are not governed by the same laws, namely ERISA that private plans are. There is no Department of Labor that protects our public employees from the wolves in sheep's clothing that stalk our public employees. EBSA might as well mean Employees Being Sold Adrift (EBSA is a division of the Department of Labor and really stands for Employee Benefit Security Administration).
Yes, there are some fiduciary laws on the books in California and other states across the U.S., but they are rarely enforced. The term Fiduciary is bantered about and there are some revolutionaries who take up its banner, but by and large our public employees are bait when it comes to their DC plan.
The new 408(b)2 rules are great rules; except they don't apply to Government DC plans.
It is so bad that in some places criminal behavior has become the norm. What would ordinarily be punished in the private sector as criminal is rewarded in the public sector, even encouraged. Transparency is the exception, rather than the rule (at least the public sector has one thing in common with the private sector!).
The term Fiduciary is truly the "F" word when it comes to public schools - not because employers don't care, but because it isn't a priority - and why should it be? I'd much rather have my local school district spend their time focusing on education - not figuring out the Alpha, Beta and Sharpe of a certain mutual fund. The issue is not that people don't care, its that it isn't even on the radar. In addition, even if it was on the radar there is no enforcement.
Politicians across the U.S. are campaigning on the issue of over-abundant pensions. Maybe they are right, maybe they are not (full disclosure: my wife if one of those people who works her....uh, well she works really hard every day as a school teacher and thus is a beneficiary of a government pension, so I may be a bit biased)...its up to the voters to decide. What is wrong with the pitch that is being made is that these politicians have absolutely no clue that they are throwing these public employees to the wolves. What is worse is that these public employees have been the prey of the wolves for decades and nobody has done anything about it (save a few good souls at CalSTRS...full disclosure: I have done and hope to continue to do consulting work for them).
For some reason we have divided DC plans into Two Americas - those in the public sector and those in the private sector. Those in the private sector enjoy the protections of ERISA (but please don't get me started on 404(c)); those in the public sector are subject to whatever the state legislature MIGHT have put into place for the state's DB plans (with few exception). Why should public employees not be entitled to the same disclosure rules under 408(b)2 (essentially full transparency of service providers) that the private sector will be entitled to come July of 2011?
Why do we have two systems of regulation for DC plans in the US (forgive me, one system of regulation, another system that is essentially unregulated).
Good people are getting hurt and suffering because of this. Moreover, when corruption occurs (and trust me, it occurs) it is not punished - in fact it is rewarded. It is an injustice that has no protector. When a government employee is sold an investment because the individual selling that investment earns a trip to some exotic locale - that employee should at a minimum be disclosed such facts and in reality the person selling the investment should be punished (It shouldn't be allowed in the first place).
Government employees DESERVE to have their DC plans run by competent Fiduciaries, not people who put their own interest ahead of participants.
I've seen too much to sit back and let the prisoners run the asylum, its time that all Government DC plans were held to a higher standard - a Fiduciary standard. Its time that those who seek to undermine public employees Income Security (hmm..perhaps we should create PERISA - the Public Employees Retirement Income Security Act) are held accountable for their actions and are duly punished, not rewarded. It is time that the Duty of Loyalty that should be owed to our public employees DC plans actually means something.
Many public employers currently do the right thing (I know because I work with them on a daily basis), but too many public employees are in plans that are not in their best interest.
I challenge all that believe in a Fiduciary Standard to join me as I work to create a Fiduciary Standard for all government employees that is actually enforced....in other words, Stay Tuned.
Scott Dauenhauer, CFP, MSFP, AIF