Legislatures should not be in the business of designing investment funds or mandating their asset allocations or muddling fiduciary responsibility.
In Wisconsin, however, that's what happened with the Wisconsin Retirement System's $3.6 billion variable fund.
Some 20% of participants in the retirement system participate in the variable fund, which returned -39% last year. The restrictions imposed by the Legislature have put those participants in an untenable position.
Years ago, the Legislature created the variable fund as a secondary piece of the WRS, whose primary component was, and is, the core fund, now $55 billion. The Legislature required the variable fund to be invested 100% in equities, conceiving it as a diversification choice for participants to counter what at that time was the 100% fixed-income allocation of the core fund. But the core fund became widely diversified over time, investing in, among other asset classes, equities, real estate and private equity.
From the onset, the Legislature made the variable fund a voluntary option for participants. Those choosing it had to place 50% of both the employer and employee contributions into the fund, plus 50% of additional contributions. The other half of the contributions remained in the core fund. The legislative design gave participants no choice of how much they could contribute and how much risk they would take on by selecting the variable fund option.
With the core fund's total equity target at 55%, the participants in the all-equity variable fund had with their contributions an effective 77.5% allocation to publicly traded equities.
Employees can permanently cancel participation in the variable fund, but because the valuation is effective the following Jan. 1, there is no opportunity for participants to time their decision to the outlook of the equity markets or their own retirement needs.
In addition, the variable fund investment returns must, by law, be fully recognized each year. As a result, participants will have their variable annuity cut this year 42%, which includes an adjustment factor that worsens the reduction.
Some participants want the Wisconsin Retirement System to make up their loss. That also would be an untenable option. It would put not just the retirement system at risk, but also the employees who didn't choose to participate in the variable fund.
State Sen. Robert Wirch, co-chair of the Joint Survey Committee on Retirement Systems, is drafting a bill to close the fund to new participants. The bill should, at minimum, allow current participants full latitude to adjust their variable allocations and it should clear up the confusing fiduciary duty, which put the participants in jeopardy, and give the Wisconsin Department of Employee Trust Funds or State of Wisconsin Investment Board clear authority to have discretion with the fund's design and allocation.