Lawsuit over pay raises
Joel Chernoff's Feb 19 article on page 3 asserts State Controller Kathleen Connell's suit against the California Public Employees' Retirement System over pay hikes will provide the "first court test of CalPERS' independence" under Proposition 162, which was designated to protect it from political meddling. Unfortunately, that is not the case.
On Sept. 17, 1998, the Sacramento County Superior Court ruled that restrictions imposed by the board on campaign contributions from those doing business with the system were invalid because the board did not follow the Administrative Procedures Act in adopting its regulations.
CalPERS had argued it was exempt from the APA. However, the court ruled CalPERS is not exempt from state laws that are not inconsistent with the board's exercise of its fiduciary duties.
In my opinion, there is little chance the court will accept CalPERS' argument that it could not meet its fiduciary obligations without setting up its own payroll system, bypassing the state controller's statutory authority, in order to award pay increases to key employees.
The court is even less likely to agree that the board cannot meet its fiduciary obligations:
* without exceeding the statutory limits on board member per diem by a factor of four, or
* by reimbursing employers substantially more than allowed by statute for the time their employee board member representatives spend on CalPERS board activities.
An editorial by Pensions & Investments in the same issue argues that "paying below-market salaries to executives at large, complex pension funds is shortsighted." Agreed. However, the CalPERS board is stretching what was meant to be minimum protection into a nearly whole wardrobe.
Skating on the edge of the law would be a bad habit for any public pension fund to acquire. CalPERS should work with the Legislature and Gov. Davis to raise legal limits, rather than asserting the board's actions are above the law.
Role of lifestyle funds
Re: "Unpopular lifestyles," a March 19 editorial.
I agree the lifestyle or life-stage approach has not been successful. However, your suggestions that employers "improve lifestyle education programs" or "provide a better mix of assets for the funds" will only further the current misuse or non-use of these funds.
By its very nature, the lifestyle fund requires no education program. The participants who would benefit from the fund do not want to hear about diversification, levels of risk or rates of return. In fact, it is this treatment of the lifestyle fund as another kind of investment option that has confused participants and turned them away.
The lifestyle fund is not a complement to other fund classes. It is an answer for participants who do not want to make the 401(k) asset allocation decision. To increase usage in the lifestyle option, plan sponsors should provide forms that state: "Check this box if want your 401(k) funds invested for you." This may mean an increase in fiduciary responsibility for employers. However, for the lifestyle/life-stage approach to really work, employees must recognize it as a way to delegate the asset allocation decision to someone else.
David L. Wray
Profit Sharing/401(k) Council of America