Tuesday, February 19, 2008

Country Roads Take Me Home....

Last month the state of West Virginia announced a proposal to allow state teachers to return to the Teacher’s Pension Plan after many were encouraged to participate in the 401(k) style defined contribution plan. Oops! The reason cited was the “poorer performing 401(k) retirement plan.”

Presently it appears that many West Virginia teachers won’t be retiring anytime soon despite approaching typical retirement age. After being encouraged and opting to move from an ailing pension plan in 1991 and thereafter, it now seems they jumped from frying pan to fire. In a plan that may be a precursor of things to come elsewhere in the U.S., if the Governor’s proposal is approved, the state will be picking up at least some of the pieces after teachers who chose the “safe” investment route have found the savings and outcome to be completely inadequate.

The demise of defined benefit (pension) plans and replacement with 401(k) style defined contribution plans moved responsibility for investment performance to the participant from professional managers and sponsors. The failure of the outcome will be debated for years to come with enough blame to go around. The companies and entities that stripped out “excess” contributions in the good times and made entirely inappropriate return assumptions get a portion. The retail investment industry who inferred that if the red headed office geek could make a fortune in the market, well, who couldn’t, gets a slice. Of course the ultimate buck, or lack thereof, stops with the employee.

Employers were relieved of any responsibility for the future well being of employees. Many of those employees went into the financial equivalent of the fetal position, investing in guaranteed return products or leaving their contributions in money market where the only real guarantee was a continual loss to inflation. The confluence of a responsible party who is effectively unable to manage one’s own investments joined the fast moving current of investment industry marketing and sales with a predictable outcome.

To cite a “poorer performing 401(k)” plan, as a reason for this failure misses the point. The poor performance was the inevitable outcome of the decision made by policy makers to cede responsibility for managing investments to those ill equipped to handle it. There is a reason we don’t allow children to drive cars. They are not sufficiently experienced to make the judgments necessary to assure a positive outcome. While I know people who have managed their retirement plans themselves with good results, I know at least as many who have not.

Negative outcomes have a ripple effect beyond a single individual. Our society will be likely be required to attend to these negative outcomes and those ripples. The decisions may be driven by ethics, morals, economics or a host of other aspects of societal sensitivity as the determination will be made of how people will live out their lives after their economic contributions to society have faded. The West Virginia taxpayer may well be picking up $75 Million of the tab of the shortfall between personal responsibility and dignity. It is always more expensive to provide for a patient in the emergency room than to provide ongoing preventative care.

There are modest efforts to provide some semblance of fiduciary responsibility for investment management in the realm of retirement plans, but the results are nowhere near sweeping enough for individual plans. Even now, I see many individuals in “safe” investments for retirement who are likely guaranteeing failure by inflation.

The underpinning principal of Stonehouse client management is to provide the degree of fiduciary care that rests on firm investment practices, legal principals of responsibility and constant monitoring of risk, performance and expenses. Putting the “cork on the fork,” as one wit called it. If you miss the mouth occasionally, at least you won’t lose an eye. The time is approaching then I expect the state will also be forced to step in to mandate steps to ensure long term economic outcome even if it flies in the face of “personal responsibility.” Or, they won’t; in which case everyone should be running their personal retirement plan like the investment managers they used to have.

John F. Barnyak
Stonehouse Asset Management