Blackstone bites hand that 'fees' it

On Jan. 5, I received an unsolicited e-mail from The Blackstone Group, an alternative asset manager and provider of financial advisory services. They invited me to watch their webcast, “The Surprises of 2010,” featuring the commentary of Byron Wien, senior managing director.

In order to earn enough investment return, firms such as Blackstone are paid large fees to invest clients' assets. More than an hour into the webcast, the moderator asks: “Looking back on one of the surprises from last year as it relates to government deficits at the state level, what is your current thinking on states such as New York, New Jersey and California?”

North Dakota does not pay Blackstone to manage pensions, but I suspect a number of public plans do. Mr. Wien's response may be one of the biggest surprises of 2010. Explains Mr. Wien, “... retirement benefits for state workers — really not only in New York, California and New Jersey but throughout the country — are very generous, too generous. We literally can't afford the benefits we've given our retirees in state and local government so we've got to change that.”

Talk about biting the hand that feeds you! I think if I were a client, I would choke on my next fee payment to The Blackstone Group.

Steve Cochrane

Executive director/chief investment officer

North Dakota State Investment Board

North Dakota Retirement and Investment Office

Bismarck

Heat is not the issue (“Target-date turnaround lowers the heat on managers' returns,” Pensions & Investments, Jan. 25). Fiduciary responsibility is. Fiduciaries really need to understand that there are choices that go beyond their record keepers, focusing on the usual trade-offs between growth/risk and safety, especially as the target date approaches. I've written an article that measures these trade-offs for the January-February 2010 issue of the Investment Management Consultants Association's magazine, Investments & Wealth Monitor.

Recall that a popular default used to be stable value. Now the pendulum has swung too far away from safety and toward growth/risk. Importantly, fiduciaries need to know that target-date funds are all “through” funds, designed to serve participants until death — target-death funds — so the date in the fund name is meaningless. This employment-to-grave objective and design is silly for two reasons: Employees don't stay in the plan after they retire and there is no glidepath that can do a sensible job of managing longevity risk.

An observation about this 2009 “vindication”: AllianceBernstein's 2010 fund recovery from a -32.7 loss in 2008 to a whopping 29.6% gain in 2009 still leaves the participant with a 13% loss, NOT the 3% loss that the casual reader might infer.

Fiduciaries have the power and duty to improve target-date funds. Regulation is a stick that won't work; demanding good target date funds is a carrot that will do the job.

Ronald J. Surz

President and CEO, PPCA Inc.

Target Date Solutions

San Clemente, Calif.