Some retirement issues seem to have been around, unfortunately, for almost a millennium. They include soft dollars and commission recapture, AIMR performance presentation, and Social Security reform. They've been argued over for years and have been the subject of commissions, studies and commentaries.
Still, they're without satisfactory resolutions and promise to remain contentious subjects long into the next millennium.
These are difficult but not intractable problems. They could be resolved using basic principles, new information and the latest technology at hand. But one reason they remain troublesome is that pension executives generally have failed to take a stand. In the new millennium they should step forward and speak out. The have valuable experience, expertise and insights.
The principles that should be applied in overcoming these problems include fairness, openness, an avoidance of conflicts of interest, and seeking the best return at appropriate levels of risk.
The new information includes greater knowledge of the needs of individuals and their behavior patterns when dealing with financial issues, greater understanding of how pension funds affect markets and how they interact with the organizations that provide services to them.
Better technology has boosted the power of pension funds, and their vendors, to do their jobs more efficiently, effectively and cheaply.
Unfortunately, these fundamental principles, along with the better information and technology, have been ignored or not applied consistently to the long-standing issues.
Looking at these concerns:
Soft dollars and commission recapture. This is important because of the potential for conflicts of interests, which can be costly to a pension fund. Despite all reports and guidelines from, among others, the Department of Labor, the Securities and Exchange Commission and the Association of Investment Management and Research, the issue of commission dollars and best execution remains.
But the markets have been changing rapidly, reducing the role of brokers. Research and other services that might have made sense to bundle as one cost of doing business now can be priced separately.
One of the reasons the issue remains is some pension fund executives are reluctant to adapt to the new era. It's not up to regulators to outlaw these practices. But it's up to the pension executives to demand more information from vendors on potential conflicts, so they can better judge the risk of doing business with any particular firm. Many pension funds don't seek that kind of information. Until they do, the issue won't be settled and doubts will remain about whether a pension fund is getting the best value for a service and avoiding vendors that have conflicts.
AIMR performance presentation. These standards were unveiled as ushering in a new dawn for the money management and pension fund communities by providing accurate, audited data on all portfolios. Money managers could no longer fudge performance by dropping some underperforming portfolios when presenting data to prospective clients.
Yet, the new AIMR reporting hasn't worked out. Money managers often get only one of two levels of the performance audit. This allows some managers to claim compliance and still provide misleading performance figures. Pension executives must begin to demand evidence of full compliance rather than simply accepting verbal or written assurances. Until they do, the standards will remain ineffective.
Social Security reform. The program created in the 1930s has had major flaws evident for two decades and acknowledged inherent shortcomings since its formation. Modern reforms, dating to the Greenspan commission during the Reagan administration, show the existing system can entrap otherwise ardent free-marketers and still defeat efforts at shoring up its worsening finances.
Clearly the program was designed for a different era. The presidential candidates have mixed views on retaining or radically reforming the system, and the issue should be debated fully during the forthcoming campaign.
Pension fund executives could help reform efforts by publicizing the advantages of privately run retirement programs, whether defined benefit or 401(k).