PA Municipal Pension Crisis
Posted on Wed, Jul 06, 2011
Pension crisis in Pa. hits municipalities
http://www.bizjournals.com/philadelphia/feature/pension-crisis-in-pa-hits.html
Philadelphia Business Journal - by Philip J. Fogli
Date: Monday, June 20, 2011, 11:35am ED
Local municipalities are required by Harrisburg to fund their police pension plans. This becomes more difficult as liabilities increase with increasing salaries and the age of officers and investment returns lag the actuarial projections. What can local officials do?
Harrisburg passed Act 44 which expanded “asset smoothing,” which allows local officials to assume that their plan has more money than it actually does have. This is like the federal funding of Social Security: Pass the liability to the future and underfund the plan now to ease the burden on current budgets.
In my opinion this approach is at least understandable, but it is not prudent. What else can local officials do? One thing is to pay close attention to the cost of running your plan. What are some of these costs? You have to pay an enrolled actuary to do bi-annual valuations and file the Act 205 actuarial report with Harrisburg. You probably employ an investment adviser to help with the management of the plan’s investments. The fees associated with this activity include the investment adviser fees, the investment managers’ fees, transaction costs and custodial charges.
Your investment adviser should help you select and negotiate the fees of the investment management firms and their transaction and custodial charges. This is only possible if you are NOT using mutual funds as your investment vehicle. Mutual funds are a great investment vehicle for small investors, but are not the best choice for institutional size portfolios. Face it, your police pension plan and perhaps your non-uniformed plan are institutional size portfolios. As such, they deserve institutional style investment programs.
What usually happens when mutual funds are the recommended investment vehicle is that the internal charges of the funds are often overlooked, not discussed and sometimes not disclosed. This is a fiduciary oversight and one that elected officials should not allow to happen.
Mutual funds have internal management fees which are disclosed in the fund’s prospectus. However, the internal transaction costs are not as readily available and can be extensive. Both of these charges need to be added to the investment adviser fees to determine the total cost for the investment management of your plan.
If you are working with an adviser who prefers individual stocks and bonds rather than mutual funds, he or she has more control to try to negotiate fees on your behalf. If you are using an adviser who recommends mutual funds, there is no opportunity to control fees. The fund family controls the management fee and the trading cost and trading activity. What is even more startling is that there are no break points in mutual funds’ management fees. You pay the same management fee percent if you have $1,000 in a fund or $1,000,000. This is another often-overlooked fact.
Finally, did your investment advisor recommend mutual funds and then convince you to liquidate a portfolio of stocks and bonds to move cash to the mutual funds? If so, did he or she discuss and disclose the cost of doing this? It could be rather expensive and is usually done to accommodate the requirement of the mutual funds to accept only cash. It may not have been done for the benefit of your portfolio.
Cost puts a drag on a portfolio. So pay attention and understand what you are paying for, and the services you are receiving. This could impact current funding requirements and reduce the strain on your budget.
