Academic journal article ABA Banking Journal

The Big Potential in Public Pension Funds

Academic journal article ABA Banking Journal

The Big Potential in Public Pension Funds

Article excerpt

By Edmon Blount, executive director of ASTEC Consulting Group, Inc., Burlington, Vt., with research assistance by Veronica A. Blount. The company works with banks and governments in administrative operations, securities processing, systems procurement, and related subjects.

Defined-contribution plans and mutual funds give government workers a new benefit hedge, and bankers a new source of business

QUESTION: How do you gain access to more than 80,000 state and local government entities, as well as to their 15 million employees?

ANSWER: Offer investment options and services to the defined-contribution plans of government agencies.

Ironically, bankers can thank the continuing problems of another government-administered pension fund, the Social Security Trust Fund, for this opportunity. On April 11, 1994, Social Security Administration trustees reported to stunned taxpayers that their assets would be totally depleted before the last of the 76 million baby-boomers retired in 2029.

The prospect of this default, now expected a full seven years sooner than the best previous estimates, inflamed already-widespread fears that the $380 billion SSA trust fund is rapidly becoming broke and may be unable to meet its commitments even to current retirees. No less than other taxpayers, the employees of government agencies began to see their future in a new light.

"Concern about Social Security is now one of the main factors driving the growth in our defined-contribution plans," says John Kozusko, Administrator of the State of California's $2.2 billion Savings Plus Program. "On top of that, many jurisdictions have been scaling back their defined-benefit plans." Kozusko says that funding problems at defined-benefit plans are encouraging agencies and their members to consider defined-contribution (DC) plans. With all this uncertainty surrounding traditional pensions, he explains, "people want to take a more active role in their retirement plans."

"Portability makes defined-contribution plans even more important to today's government employees," adds Marty Walton, director of IRC Section 457 programs at California's Public Employee Retirement System, because they can control the assets as they move in and out of public service.

For all these reasons, workers are stockpiling assets in their DC plans with gusto, perhaps recalling how IRA eligibility was cut back in the 1980s by tax reformers. There's no secret to the attraction of DC plans. By allocating their funds skillfully, the participants in IRC Section 457, 403(b) and 401(k) plans, unlike participants in fixed, defined-benefit plans, can reduce the effect of tax increases, while picking up the slack from Social Security revisions and employer pension cutbacks.

A shift to stocks

Looming even more ominously than the Social Security forecast are the inflation alerts being issued with growing frequency by Federal Reserve officials. Many pension administrators expect these warnings to be reflected in investment policy changes dictated by their members and beneficiaries. Surely, the changing asset mix is already visible in DC plans.

Participants in California's Savings Plus program, the nation's largest defined-contribution plan for government employees and one of the top five overall, have been re-balancing away from fixed-income assets. As a group, they've remixed their holdings from 90% invested in insurance contracts ten years ago to 50% in stocks today. Overall, the California Savings Plus plan now offers 17 investment options, including retail mutual funds from Vanguard, T. Rowe Price, John Hancock, and Putnam.

Similar transformations of once-stodgy DC plans can be seen across the country. Participants in the State of Maryland's $700 million supplemental retirement programs are offered a choice of equity mutual funds, as well as bond funds and investment contract funds. Until recently, 60% of new investments were directed towards investment contracts. …

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