P&I’s top stories of 2019 highlight changing world

Sociopolitical, legislative, regulatory and even moral concerns for those in the retirement plan and money management industry were the most notable themes in Pensions & Investments' top 10 stories of 2019.

The top story this year as chosen by P&I's editors was the impact of the ongoing trade war with China, including potential limits of the investments allowed in the $599.5 billion Federal Thrift Savings Plan, Washington, the largest U.S. retirement plan.

Other big stories of the year reflected the sometimes contentious debate of what the future of retirement and institutional money management should look like: The U.S. Congress debated the vital topics of retirement security and multiemployer pension plan reform, the SEC courted controversy with several key regulatory changes, a prominent money manager wiped out billions of his firm's assets under management with the utterance of a few sentences and Yu Ben Meng took over as the new chief investment officer of the largest U.S. defined benefit plan.

Here's a look back at the headlines that drove Pensions & Investments' coverage in 2019:

Continuing fears surrounding the threat of protectionism and a trade war between the U.S. and China reached its peak in September 2019 when officials in the administration of President Donald Trump began to consider limiting U.S. investors' portfolio flows into China. Those deliberations were taking place even as China's gradual removal of limits on foreign investments had accelerated the flow of institutional money into the economic behemoth due primarily to index inclusions.

In November, a conflict arose between the U.S. Senate and the $599.5 billion Thrift Savings Plan, Washington, when Sens. Marco Rubio, R-Fla., and Jeanne Shaheen, D-N.H., introduced a bill that would prevent the largest U.S. retirement plan from directing billions of dollars of its assets to China through the shift of its I Fund benchmark to the MSCI ACWI ex-U.S. Investable Market index from the MSCI EAFE index.

The new index is made up of about 8% Chinese companies. As of year-end 2018, the I Fund had $40.7 billion in assets and the savings plan's board on Nov. 13 upheld its 2017 decision to shift to that index.

The board sent a memo to Senate staff that the bill "discriminates against 5.8 million employees, retirees and service members by restricting their ability to direct their money and save for their retirement. This prohibition does not apply to any other 401(k) or IRA that the more than 60 million Americans use to save for their retirement."

Broadly, both asset owners and money managers felt it necessary in 2019 to either implement or consider more defensive postures if global economic indicators worsened following further escalation of the trade war. For example, Christopher Ailman, CIO of the $246 billion California State Teachers' Retirement System, West Sacramento, said in a September report to his board that his staff has its "leg out to shift to a very defensive strategy" should economic indicators worsen, saying at the time that the equity bull market looked as if it were running out of steam.

That said, the S&P 500 and MSCI EAFE indexes still returned 27.39% and 17.99% respectively, year-to-date as of Dec. 18.

In March, the U.S. House of Representatives introduced the Setting Every Community up for Retirement Enhancement Act of 2019, known as the SECURE Act. The measure included the core provisions of the previous year's failed bill, the Retirement Enhancement Savings Act, such as making it easier for smaller employers to join open multiple employer plans, easing non-discrimination rules for frozen defined benefit plans and adding a safe harbor for selecting lifetime income providers in defined contribution plans.

After the House approved the bill in May, three lawmakers placed a hold on the bill in the Senate, objecting to the removal of provisions that, among other things, would have allowed funds in 529 college savings plans to be used for home schooling costs and supplies for K-12 students. For months, the bill seemed hopelessly stalled until it was attached in December to an eight-bill spending package and passed by the House on Dec. 17 and then the Senate on Dec. 19. Mr. Trump was expected to sign it at press time.

While the SECURE Act of 2019 seems to have jumped its considerable hurdles, federal action on multiemployer reform is still pending. In November, a Senate Republican proposal to help critically underfunded multiemployer pension funds and prevent more was introduced by Finance Committee Chairman Chuck Grassley of Iowa and Health, Education, Labor and Pensions Committee Chairman Lamar Alexander of Tennessee.

The Pension Benefit Guaranty Corp.'s multiemployer program is projected to be insolvent by 2025.

Meanwhile, individual states continued to establish their own programs to bolster retirement security.

New Jersey Gov. Phil Murphy signed legislation in March creating the New Jersey Secure Choice Savings Program, designed to help workers whose employers don't provide defined contribution plans establish retirement savings accounts. Similar programs targeting private sector workers already have launched in Oregon and Illinois.

On July 1, the CalSavers Retirement Savings program launched following the dismissal on March 28 by a U.S. District Court of a lawsuit filed by the Howard Jarvis Taxpayers Association alleging the Employee Retirement Income Security Act preempts the program.

U.S. District Judge Morrison C. England Jr. in Sacramento said because the program only applies to employers without existing retirement plans, no ERISA plans are "governed" or "interfered" with.

The Department of Justice in September issued a statement of interest in getting involved somehow with the dismissed lawsuit.

The third top story of the year involved the SEC, which rarely stirs up as much of a furor as it did in 2019.

The year began with controversy over the SEC's December 2018 approval of the implementation of a two-year transaction fee pilot program to measure the effects of maker-taker rebates on equity trade execution.

In February, the New York Stock Exchange, Nasdaq and Cboe all filed petitions with federal courts to stop the program. The NYSE, for one, asked to have the program ruled unlawful, saying that it is "arbitrary and capricious," does not promote competition and exceeds the agency's authority.

Nasdaq said in a statement at the time that it believed the SEC's pilot "will harm capital formation, severely damage market participation with wider spreads, and increase the cost of capital for corporate issuers."

Under pressure from court challenges, the SEC put the program on hold in March.

In June, SEC commissioners approved a standards-of-conduct package, commonly known as Reg BI, which features a best-interest standard that compels brokers to put clients' financial interests ahead of their own and requires them to mitigate financial conflicts. Consumer advocacy groups including AARP said the regulation was too ambiguous and doesn't mitigate conflicts of interest. Other critics said the action was too vague and was not legally enforceable.

The U.S. House of Representatives passed an amendment attached to a larger spending bill later in June to prohibit enforcement of the rule, and eight attorneys general filed a federal lawsuit in September challenging the rule.

Finally, in August, the SEC approved guidance stipulating that proxy advisory firms must disclose how they reach their shareholder recommendations. The new rules also include changes to the shareholder proposal process, raising the minimum amount of stock held and the time held — currently $2,000 and one year — before shareholders could file resolutions at annual corporate meetings. The new proposal calls for a minimum of $2,000 and three years, $15,000 and two years or $25,000 for one year. While the business community applauded the move, others were less enthusiastic.

The Council of Institutional Investors urged the agency in October to change course, and proxy advisory firm Institutional Shareholder Services Inc. went a step further later that month, suing the SEC for what it termed as exceeding the agency's authority. Both were in response to the SEC's decision that proxy-voting advice generally constitutes a "solicitation" under the federal proxy rules and said the failure to disclose certain information required under existing law would render the advice materially false or misleading.

The fourth top story of the year began on Oct. 8 at the Tiburon CEO Summit in San Francisco, when Kenneth Fisher, Fisher Investments' founder, executive chairman and co-CIO, uttered a few sentences that cost his firm mightily.

Mr. Fisher's comments about genitalia and his comparison of winning asset management clients to "trying to get into a girl's pants" inflamed both the public and Fisher Investments' institutional clients.

The $74.5 billion Michigan Retirement Systems was the first organization to terminate Fisher Investments on Oct. 10, where it had managed a $600 million U.S. midcap equity strategy. Jon M. Braeutigam, CIO of the Michigan Bureau of Investments, which manages the state pension funds, termed Mr. Fisher's comments "completely unacceptable" in a memo and that "prompt termination was the correct course of action."

Multiple asset owners followed, costing his firm nearly $4 billion in assets under management.

The firm had managed a total of $112 billion as of Sept. 30, $35 billion of which was institutional investors and subadvisory assignments, according to its website.

The fifth top story of the year was Mr. Meng's ascension to the role of CIO at CalPERS. The appointment of a new head of investment management at the U.S.'s largest defined benefit plan is always news, but in 2019 the change in leadership was particularly notable because the pension fund had not achieved its assumed rate of return for the 10- and 20-year periods ended June 30, 2018.

The $388.9 billion California Public Employees' Retirement System, Sacramento, had to embrace change.

"We have to be nimble, dynamic," Mr. Meng said in an interview following his first presentation to CalPERS' board on Jan. 22. "If the market dictates to be more opportunistic, we should be more opportunistic. If the market dictates to be more tactical, we should be more tactical."

In February, Mr. Meng promoted the idea of raising CalPERS' private equity allocation, sharing a chart at a CalPERS' investment committee meeting showing that raising private equity to 16% target would increase the total fund's expected return to 7.3%, compared to 7% with the current 8% private equity target allocation. Also this year, Mr. Meng shifted more investment discretion to staff, continued developing CalPERS' more direct model with private equity, and shifted more equity assets in-house and cut its emerging manager program. The latter moves are the most dramatic in a year full of change. P&I reported in December CalPERS will now have $500 million with equity emerging managers, down from $3.5 billion invested with equity emerging managers as of June 30 and only $5 billion in the hands of external managers, down from around $30 billion.

Institutional investors' money continued to pour into China as asset owners invested more in Chinese strategies and more money managers launched onshore funds in China. MSCI announced in February it would increase MSCI China A large-cap and midcap securities to 20% from 5% of their respective free float-adjusted market capital izations in three stages in 2019, and in April, Chinese bonds were added to the Bloomberg Barclays Global Aggregate benchmark.

The Fed cut rates three times in 2019 at three straight meetings concluding on Oct. 30 when the Federal Open Markets Committee cut the federal funds rate to a range of 1.5% to 1.75%. "Weakness in global growth and trade developments weighed on the economy and pose ongoing risks," Federal Reserve Chairman Jerome Powell said at an Oct. 30 press conference. "These factors, in conjunction with muted inflation pressures have led us to lower our assessment of the appropriate level of the federal funds rate over the past year." The shift was in stark contrast to 2018, when the Fed raised rates a total of four times, as well as Mr. Powell's comments at the American Economic Association's annual meeting in January, when he said the committee projected the federal funds rate would rise to 2.9% by the end of 2019.

The lower rates are expected to put more pressure on U.S. corporate pension plan liabilities and fixed-income investments.

The ¥161.8 trillion ($1.5 trillion) Government Pension Investment Fund, Tokyo, launched a performance fee strategy in 2018, where active managers are only paid active management fees if they outperform passive strategies. Data in 2019 show the enormous impact on the change in strategy, which Hiromichi Mizuno, GPIF's executive managing director and CIO, touted in August as a possible industry standard. The annual report for the world's largest pension fund July 5 showed GPIF's payments to managers for the fiscal year ended March 31 plunged 40% to ¥29.5 billion from a record ¥48.7 billion the year before.

In expanding its interest in ESG issues, the pension fund earlier this year expanded its partnership with the World Bank by investing in World Bank-issued green, social and sustainable development bonds, and announced its plans to request ESG indexes for non-Japanese equities, integrating ESG factors in selecting and weighting index constituents. GPIF also raised the bar on fiduciary stewardship standards with its Dec. 3 decision to suspend the stock-lending program it introduced in 2014 for international equities.

Two of the larger sponsors of U.S. corporate defined benefit plans joined their brethren in closing or freezing their plans. In October, General Electric Co., Boston, announced it plans to freeze its U.S. pension plan for about 20,000 salaried employees and its U.S. supplementary pension plan for some 700 employees. Employees affected by the freeze will move into the firm's 401(k) plan effective Jan. 1, 2021.

GE had a total of $50 billion in DB assets and $68.5 billion in liabilities as of Dec. 31, for a funding ratio of 73%, according to the company's most recent 10-K filing. In November, FedEx Corp., Memphis, Tenn., announced plans to close its U.S. defined benefit plan to new hires effective Jan. 1 and increase the company match in its 401(k) plan a year later. Employees hired or rehired after Jan. 1 will be automatically enrolled into the 401(k) plan, which will have "enhanced" benefits effective Jan. 1, 2021. As of May 31, FedEx's U.S. defined benefit plan assets totaled $22.3 billion, while projected benefit obligations totaled $26.6 billion, for a funding ratio of 83.8%, according to the company's most recent 10-K filing.

Mr. Bogle, creator of the indexed mutual fund and the founder of Vanguard Group in 1974, died on Jan. 16 at age 89. Less than two months before his death, Mr. Bogle's continuing influence as a contrarian could still be felt when he challenged his peers to look beyond the success of indexing in a Wall Street Journal op-ed. "Jack Bogle democratized investing. Through his creation of the first index mutual fund he made it possible for individual investors to gain exposure to the broad stock market, thus acquiring a diversified portfolio at low cost. Though derided as 'Bogle's folly' initially, the index fund has made 401(k) plans suitable as retirement vehicles for millions of workers because of that low cost," P&I's former Editor Michael J. Clowes said in a January interview.