Pension plans, otherwise known as defined benefit plans, are rife with mismanagement, conflicts of interest and outright fraud, charges an investment advocate.
That's a major reason why so many of them are underfunded and underperforming the overall market, writes
Dan Solin, director of investor advocacy for the BAM Alliance and a wealth advisor with Buckingham. Only one state, Oregon, outperformed a comparable passive index fund, and that was only by a small margin.
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The solution to their mismanagement and underperformance, Solin says, is simple.
"Pension plans should fire their expensive consultants, who are engaged in the zero-sum game of trying to pick 'winning' fund managers, and switch to low-cost passive investing."
Unfortunately, that won't happen, he says.
Trustees of large public pension plans are wined and dined by prospective advisors and consultants eager for their business. Decisions on adding and dropping funds, and expensive dinners and meetings, are never ending.
Pension funds find it difficult to give up the ego-boosting process and the "thrill of the chase" that passive strategies would end.
"It's regrettable that the plundering of public pension plans continues unabated," he writes. "At some point, better educated participants are no longer going to take it, and will hold trustees accountable for their conduct."
A report from the United Kingdom found that local pension plans could save up to $394 million annually by converting to passive investments, Solin notes. Using international studies, including ones from the United States, the study concluded that on average any extra performance boost from active management doesn't make up for its additional costs.
Index Fund Advisors Inc., a fee-only financial advisor, agrees that pension funds suffer from a conflict of interest. "Because these consultants are paid to conduct searches for winning managers, they are inherently conflicted, likely finding it difficult to advise their clients to abandon the losing game of active management and opt instead for a passive portfolio."
These consultants probably know their incomes would disappear if pension funds opted for passively managed funds.
"It is difficult to get a man to understand something when his salary depends upon his not understanding it," said Upton Sinclair.
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