The Sept. 15 Portfolio Management article by Kenneth L. Kahn contains arguments that should be taken with a large grain of salt. Readers unfamiliar with his firm were done a disservice by your simple identification of him as "president at Alpha Management Inc., San Francisco." You failed to disclose that Alpha is (among other things) the directed brokerage arm of Callan Associates, and that as such his apparently balanced presentation of the "pros and cons" might be somewhat less than unbiased by his perspective.
Nonetheless, I commend Mr. Kahn on his elucidation of the issues, as far as he goes. He mentions some brokers offer to "refund 'excess' commissions to the sponsor(s)." This excess is the heart of the problem. Plan sponsors need to work together to encourage the brokerage community to unbundle its pricing of services. The "excess" commissions are effectively a cross-subsidization of services that should be unbundled and fairly priced. Without this needed change, true transparency is lost and true performance cannot be measured.
Mr. Kahn is correct that "a plan sponsor's fiduciary duty includes making sure that the funds are ably managed and that plan assets are appropriately used." The commissions are an asset of the plan. I believe a plan's commissions should be used solely to access liquidity. The practices of "soft dollars" and "commission recapture" serve to perpetuate the unfair bundled commission practices of Wall Street. True "best execution" means not allowing the brokers to charge "excess" commissions.
I believe it is in our power as plan sponsors and institutional investors to encourage this needed unbundling. We can change the world instead of choosing the lesser of evils and adopting commission recapture programs because "that's the way the business works." Wall Street, of all places, should be subject to market forces. We have the power to be a market force and improve our ability to be effective fiduciaries.
Indiana Public Employees'
Can't privatize PBGC
James B. Lockhart III gives his view in a Sept. 29 Others' Views commentary as to why the Pension Benefit Guaranty Corp. can and should be privatized. Unfortunately, the contingencies against which the PBGC provides protection do not lend themselves to the "spreading of risk" concept of insurance.
As long as defined benefit plans "randomly" fail, the PBGC can use the premiums from the solvent plans to pay the benefits due from the bankrupt plans. However, if a catastrophe such as a sustained stock market crash should occur, too many businesses would fail and a privatized PBGC would not have the wherewithal to support the suddenly underfunded defined benefit plans. In effect, a privatized PBGC would be taking on the risk of insuring the U.S. economy, and no private insurance company would be so reckless.
As an analogy, suppose a company with a defined benefit pension plan with a Social Security offset formula wished to purchase insurance to protect against the increased plan costs that would result if Social Security benefits were significantly reduced (or completely eliminated). At first blush, the idea of "Social Security insurance" might seem like a new product idea for the insurance industry. However, it does not take long to figure out that, depending on the future health of the Social Security system, either no policyholder will file a claim or all of them will. Because there can be no in-between, the insurance concept will not work.
I was very disappointed in what I view as a very unfair and biased article on three individuals who are making substantial sacrifices to give public services (Page 1, Sept. 1). One of those sacrifices is having to deal with unfair treatment by the press, at worst, and, in this case, unbalanced treatment at best.
Having served in the Department of Labor's pension program and at the Pension Benefit Guaranty Corp., and then on advisory groups at both, I can attest to the problems of any ownership of stocks or stock funds while in such positions.
The appearance of conflict cannot be avoided by a pension regulator. Ms. Freed, quoted in your article, is wrong on the ability of Ms. Berg to invest freely in mutual funds without charges of conflict. Now, mutual funds are a major part of 401(k) plans, and their communications, fees, exemptions, etc. For Ms. Berg, investing in a fund could carry as many appearance problems as the secretary of energy investing in that industry.
For David Strauss, now at an agency with more than $1 billion invested in equities, with a number of hired managers, I would think he might leave the markets as well, rather than face appearance issues later. This is why public officials sometimes use blind trusts, but those are not cheap or easy to set up. After your article, were I him, I would wish that all my investments had been in a money market account to avoid such a personal intrusion. These filings are done to assure disclosure to avoid conflicts, not to subject individuals to this type of tabloid journalistic treatment.
For the secretary of labor, time to deal with investments is not likely to be available, even if desired. That would have been true during her White House years as well. And, better to be criticized for overallocation to real estate, than to invest in companies or funds that attended teas, made campaign contributions, and lobby daily for favorable government actions.
My real pain over this article relates to my desire to have the highest quality individuals serving in these positions, who through their decisions serve to shape and determine the future of the retirement income system. Articles like this one cause many good people to reject such positions, or to leave them once in them.
How many of your staff, let alone your readers, would appreciate such scrutiny of their financial holdings and behavior? I urge you to leave such tabloid journalism to "supermarket" publications and return to your normal high standards of journalism.
Dallas L. Salisbury
President and chief executive officer
Employee Benefit Research Institute
Regulators' own investing
I have settled on the word "disappointed" to describe my reaction to your page one Sept. 1 article on the personal portfolios of civil servants Herman, Strauss and Berg.
Your actions in mixing public disclosure statements with analysis by financial planners produced a ridiculous, meaningless product.
We were told the Pension Benefit Guaranty Corp. director has no exposure to small-cap stocks, emerging markets or international bonds. The secretary of labor might be overallocated to real estate. The assistant secretary of labor invests very conservatively.
Is the reader supposed to draw the conclusion that your report implied: that because of how these people invest, they are not qualified to direct national pension policy?
Forced to read the article because I couldn't believe my eyes, I came to a different conclusion. I saw government executives who had not accumulated great wealth but had done reasonably well without any hint of a conflict of interests.
I wrote to Ms. Berg in 1995 on the subject of employees of some not-for-profit agencies who had no opportunity for saving under sections 401(k), 403(b) or 457. I received a personal call from a senior official who assured me this matter was a priority of the Department of Labor.
In 1996, access to 401(k) plans for such employees was adopted as part of the sweeping pension reform law. My employees won't care about the liquidity of Ms. Berg's personal investments as they make contributions to a supplemental retirement plan she helped make possible.
Meanwhile, the PBGC produced a positive balance of assets over liabilities and the new secretary look her oath, then hit the ground running.
It's called public service.
Who cares where these people investment their own money?
Daniel W. Ryan
United Food and Commercial Workers
and Employers Midwest Benefits Fund