Management of Pension Funds Needs Reform
Time was when pension-fund managers were a pretty straight-laced bunch. Buy some blue chips and triple-A’s, and then sit back and watch the grass grow.
Then came the go-go years of the ‘60s. Somebody began comparing investment records. Now the idea is to buy American Telephone & Telegraph Co. today, trade it in for General Motors Corp. tomorrow, and dump the whole mess the next day. All that in quest of something called “performance.”
What have we, the beneficiaries of these funds, gotten out of all of this? Our funds have been managed right into a net loss, after adjustment for inflation.
“All of the fund managers say they’re making money by their measurement, but our studies show they haven’t broken even (in real terms) in 10 of the last 20 years,” says Robert Monks, a consultant to the Labor Department who just stepped down as its chief pension watchdog.
In other words, we probably were better off watching the grass grow.
Rough for Investors
The last dozen years, of course, have been rough ones for any investor, with bouts of double-digit inflation and a stock market that generally undervalues corporate assets. Even so, churning assets is hard to justify.
What’s worse, the people managing our retirement money are biting the hand that pours all that cash into the funds--corporate America. Never mind that our interests are long-term, the fund managers’ drive for quick gains serves to intimidate our big employers into paying undue attention to short-term results. Corporate management, more than ever, fears unhappy fund managers will dump their company’s stock at the first downturn or hostile tender offer.
That’s an oversimplification, of course. But consider that 60% to 70% of pension fund holdings now are changed every year. How many of us would do that with our own savings?
Monks observes that all the funds are doing is shifting investments in the Fortune 500 companies among themselves. Hence, as a group, it all comes to naught. In an effort to instill some common sense, Monks considered a rule that would make holding any investment less than three years evidence not of performance by a fund manager but of imprudence. That’s too rigid, he agrees, but it would make a good general guideline.
Another even more effective reform would be for the sponsors of these retirement plans, the employers, to start paying more attention to fund-management practices. More than that, they might assign stronger managers to their employee benefit operations and keep the management of the funds in-house, eliminating some of the useless competition among outside pension-fund managers.
Give Workers a Voice
If that were done, a certain degree of investment judgment independent of management would have to be insured. Amazingly, few people suggest an obvious way--give the beneficiaries, the employees, some direct say in the process. It’s doubtful we could do worse than the professionals.
Two other steps clearly are needed. One is to broaden the investments beyond the confines of the Fortune 500 to include at least some smaller enterprises and new ventures. Such investing, like most of the rest, should be long-term.
The other is to define the role of fund management in the affairs of corporate management. It is absurd to put all those funds into the hands of so few managers--50% of the funds are in just 200 retirement plans--and then let them decide how to vote huge blocks of stock. Influence of such significance belongs in broader hands, perhaps a committee representing all of the interests involved, including corporate sponsors and their employees.
With institutional investors dominating the stock market and pension funds accounting for the lion’s share of the capital, correcting the serious problems created by misguided pension fund investment practices would do much to right a number of wrongs in our capital markets.
Who knows, it might even make us some money.
