In response to Keith Ambachtsheer's Aug. 4 Others' Views commentary, "Dedicated governance a 'win-win' solution."
Mr. Ambachtsheer correctly notes that Douglas B. Roberts, Michigan state treasurer, and Matthew J. Hanley, treasury legislative specialist, did not list the down sides of the state of Michigan moving from defined benefit to defined contribution in their March 31 Others' Views commentary.
However, this is hardly an unusual event - few people present balanced views of their positions, this author and Mr. Ambachtsheer included. His commentary makes a number of assumptions that I think reflect the difference between Canadian and American thinking on retirement and financial planning.
In attacking the "for-profits," Mr. Ambachtsheer states he knows of no evidence that the "risk adjusted gross returns of the 'for-profits' are higher than those of the 'dedicated'." This may or may not be true, but it is definitely irrelevant to the state of Michigan's move to defined contribution.
For a young investor, the public employee defined benefit plan historically provides a far lower return than one optimized for the risk suitability. As a 25-year-old, I am 100% invested in aggressive equities, mixed between U.S., international and emerging markets. Since I am 40 years from retirement, I have no need to invest any assets in bonds and money market instruments as pension plans do.
Given that my preference is to invest aggressively when young, and more conservatively when older, I will need a different set of investments as I grow older. Dedicated systems, by their definition, have no life cycle, and are unable to optimize their investment for individual's risk acceptance.
Where can I get an aggressive mix of equity investments for my retirement? Not from the defined benefit plan. Instead, I use a mutual fund company - a service for which I am far better off paying an additional 130 basis points annually than to be stuck for 40 years in the 60% equity/40% long bonds that most pension plans target.
So, yes, I am more than happy to pay more for a better allocation of my retirement assets, rather than have some state bureaucrat "take care" of my needs. In all aspects of our economy, consumer choice and preference is reigning supreme. That is what is driving changes in businesses across the globe and is something Americans embrace. The steady change from defined benefit to defined contribution plans reflects this.
As for the argument that state pension boards are somehow better focused on adding value to their pensioners than the "for profits," this statement is both legally suspect and contradicted by experience.
Private pension plans are covered by ERISA, or the Employee Retirement Income Security Act of 1974, and public mutual funds are covered by the 1940 Investment Company Act. Both laws require that fund managers invest in the best interest of their beneficiaries and shareholders.
Public pension plans are protected under common law, but this has not provided the same level of protection for state employees. The Alaska public employees and teachers retirement funds lent $165 million (35% of total assets) to make mortgages in Alaska in 1980. As the economy there suffered, 40% of the loans became delinquent or were foreclosed. In 1989, the state of Connecticut invested $25 million in Colt Firearms, only to see the company slip into bankruptcy. Despite its low expense ratio, the California Public Employees's Retirement System is only one aggressive governor and legislature away from investing in alfalfa farms, electric cars, single-family homes in fault zones, or even energy efficient Jacuzzis in Malibu.
Given a choice, I will pay more to be able to select my investments and manage my own risk. The defined contribution plan that Michigan is moving toward is a model for other states, and goes a long way to providing safety, flexibility, opportunity and choice to the public employees of the state of Michigan. Worldwide, few consumers or providers want the government to dictate retirement, health care, wealth and income levels. Ultimately, employee choice and flexibility is the only true "win-win" solution.