Connecticut’s New Treasurer Pushes for Pension Shortfall Remedies

Out to plug a multi-billion-plus pension hole at the top of his to-do list, Connecticut’s new treasurer is juggling fixes that include lottery money.

Lack of contributions and poor investment decisions have caused the state’s two retirement plans, the $17 billion Teachers Retirement System and the $12 billion State Employees Retirement System, to dig themselves a hole which has put Connecticut’s state finances in jeopardy.

That’s why Shawn Wooden, the state’s new treasurer, is eyeing proposals like tapping the state lottery to make up the difference, as well as stretching out bond payments.

He said one of the biggest problems the state has is a lack of budgetary flexibility, which hurts the payment stream for retirees, and puts a further strain on the state funding deficit.

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He’s waiting on Gov. Ned Lamont’s final say on his annual budget proposals, due February 20. Lamont currently has issues with a $1.45 billion deficit in the state’s $20 billion operating budget, set to take effect in July.

“In particular, the mission is to create and have a pension system that is long-term and sustainable and to do that in a manner that’s affordable for taxpayers,” Wooden told the Connecticut Post.

One of Wooden’s proposals is to increase the length of time the state pays off its pension bonds so it can focus on paying down liabilities that can grow upwards of $3 billion a year for just the teachers’ system.

Other possibilities to bridge the pension gap include accessing lottery revenue and renting out state-owned real estate, or making benefits changes as a means to help solve the problem. These were first floated by state’s legislature-appointed taskforce, the Pension Sustainability Commission, focused mostly concerned with the state’s $37 billion unfunded liability,

Wooden said lotto could “play a role” in the funding fix, but also said taxpayers should be paying attention to the issue as well. He added that the pension bonds have clauses that cap how much he can do to restructure the debt, but his plan works within those guidelines.

Connecticut recently lowered its assumed rate of return, from 8.5% to 8% for the teachers’ retirement system, and 6.9% for the employees’ fund.

The state of Connecticut is 41% funded, according to Pew Charitable Trusts.

Wooden took over from Denise Nappier Jan. 1.

Neither the treasurer, the sustainability commission, nor Cavanaugh Macdonald Consulting, who has provided insight for the teachers’ fund, was able to be reached for comment.

Tags: Connecticut, Funding Deficit, Pension, Shawn Wooden

Asset manager American Century Investments has won a class action lawsuit that had accused the firm of violating its ERISA duties by profiting from its 401(k) plan at the expense of its employees by only offering its own mutual funds in the plan.

In its complaint against American Century, the plaintiffs, who were participants in the company’s 401(k) plan, accused the firm of using the plan “as an opportunity to promote American Century’s mutual fund business and maximize profits at the expense of the plan and its participants.”

It said that the firm loaded the plan exclusively with its own investment offerings, without investigating whether the participants would be better served by investments managed by unaffiliated companies.

“The retention of these proprietary mutual funds has cost plan participants millions of dollars in excess fees,” said the complaint.

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However, a US district court judge ruled that the plaintiffs failed to prove American Century breached any fiduciary duty to participants.

“Plaintiffs repeatedly emphasize that defendants only considered American Century funds in the plan, which they argue evidences a motivation to benefit American Century,” said Judge Greg Kays in his decision. “But it is not disloyal as a matter of law to offer only proprietary funds. In fact, it is common for financial service companies to offer their own investment funds in their retirement plans. And there is no duty to offer more than one investment company’s funds.”

Although the plan consisted of only American Century funds, the court found that it contained a diverse array of asset classes and investment styles covering the entire risk/reward spectrum. For example, the plan offered funds from money market accounts, several specialty funds and common stock funds, as well as a significant number of large cap equity funds, and many small- and mid-cap equity funds as well, the court said.

‘The ruling is a complete vindication of American Century Investments, as well our colleagues who make up the retirement committee overseeing our company retirement plan,” Chris Doyle, spokesman for American Century Investments, said in an email to CIO. “The judge’s well-reasoned ruling found that American Century and the members of that retirement committee acted in the best interests of plan participants and followed a prudent oversight process.”

The plaintiffs argued that the American Century Retirement Plan Retirement Committee, which administers the company’s 401(k) plan operated under a conflict of interest because members served as both employees of American Century and as plan fiduciaries.

“But ERISA does not prohibit an employer’s corporate officer or employee from serving as a plan fiduciary,” wrote Kays in his ruling. “It merely requires the officer wear the fiduciary hat when making fiduciary decisions.”

Doyle said the ruling was not just a victory for American Century, but that “it’s good for the industry and ultimately plan participants because it will help liberate investment committees to make investment selections based on participants’ best interests instead of single factors like fees or litigation concerns.”

Tags: American Century Investments, Defined Contribution, ERISA, Litigation