For once, political figures are not suggesting taking money out of a public pension fund, but providing more cash flow into it. But in this case, there is no reason to cheer. The ideas would be harmful to the well-being of the fund.
Former U.S. Rep. Joseph Kennedy's recommendation to allow all residents of Massachusetts to invest in the $36.1 billion state pension fund administered by the Massachusetts Pension Reserves Investment Management Board is preposterous.
His idea — allowing residents to invest their personal savings in the PRIM fund — would give the fund the additional task of becoming a giant state-run mutual fund company along with its primary duty to oversee state pension fund investments.
Timothy P. Cahill, state treasurer, is interested in exploring the idea. Plus he has an idea of his own: His office is preparing to draft legislation to allow some non-profit organizations that don't offer pension benefits to set up 401(k) plans that would then use the defined contribution investment options of the state's 457 plan. The idea would enable the state to "support non-profit pensions at low cost," according to a report quoting a spokeswoman for Mr. Cahill.
The state, however, isn't in the business of managing private saving or private pension plans.
The mutual fund idea stems in part from the PRIM fund's performance — 14.4% in 2004.
Despite the return, there is no good reason for adopting the idea.
The objectives of the pension plan are different from those of the myriad individuals who would save through the fund, such as in terms of time horizon and risk tolerance.
Allowing PRIM to also act as a sort of mutual fund for individual investors would diminish overall return because the fund would have to provide for unexpected liquidity, both cash flow in and out by individuals every day; that would add to trading costs.
The PRIM fund is invested to take advantage of its tax-exempt status; so individuals could face unwanted tax bites because investments are made without regard to tax consequences.
What happens if the personal savings become just as big or bigger than the pension investments? Whose interest should then be paramount?
How much would it cost PRIM to unitize its investment strategies? How much would PRIM charge residents?
Massachusetts is filled with money management companies, from two of the biggest in the world — Fidelity and State Street — on down to boutiques, offering innumerable investment choices. Why add risk, cost and potential liability to PRIM or the 457 plan?
If the PRIM saving option or the extension of the 457 to outside groups is adopted, will political officials tell the public when it is time to pull out of the PRIM or 457 fund, if either of their returns no longer meets benchmark objectives? Such a call to pull out could create a crisis of confidence and a run to withdraw from the funds.
If political figures and politicians would like to see Massachusetts residents earn a better return on their savings, or have 401(k)-type investments, they ought to press for personal accounts for Social Security, allowing participants a chance to earn a better return than the dismal benefits they now receive. And they should urge residents and non-profits to go out into the market to look for money mangers and pension-design programs on their own. After all, Massachusetts has a state pension fund and 457 fund to run, big enough tasks alone.