DiNapoli Proposes National Commission to Address Retirement

Thomas DiNapoli, the New York state comptroller and sole trustee of the $147 billion New York State Common Retirement Fund, has suggested creating a national commission “to talk about ways to maintain existing defined benefit plans.”

(December 16, 2011) — Now is the time for a National Commission to address the decline of retirement security, asserts Thomas DiNapoli, the New York state comptroller and sole trustee of the $147 billion New York State Common Retirement Fund.

“The Commission must develop strategies to assure the continued viability of solid, well-funded defined benefit public pension plans and identify strategies to restore the finances of plans that have fallen into disrepair, DiNapoli stated in a wide-ranging discussion of the New York public pension system at the New School’s Schwartz Center for Economic Policy Analysis in New York City.

He continued: “Both in the ways government sponsors design and fund plans, it is critical to adhere to best practices. Guidance or mandates may need to come from federal action. On the investment side, there is much work to be done to ensure that pension fund trustees fulfill their fiduciary responsibilities. Best practices and federal law can help ensure that trustees pay careful attention to review of asset allocation, recoveries from litigation, and proper attention to the use of consultants and payment of commissions and fees.”

According to DiNapoli, the proposed Commission would focus on the longer-term problem of the erosion of retirement security. “We need to put a retirement system in place that allows the middle class to retire in dignity and forestalls the profound future costs on government and individual taxpayers of providing food, housing and other support to millions of Americans – living well into their nineties – who simply don’t have enough to support themselves,” he said.

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Furthermore, the Comptroller proposed that the Commission also evaluate whether federal laws should be amended to encourage consortiums of smaller pension plans with the goal of achieving the economies of scale in benefits and investments. He concluded: “With the gridlock in Washington and the lack of resources, this type of federal intervention for pensions today is unlikely. However, at the very least, instead of joining the race to the bottom to dismantle pension systems, this is the time to preserve pension plans that are proven to work, help those that need fixing, and tackle the larger question of what can be done for those not covered by pensions.”

DiNapoli has also been vocal about defending defined benefit (DB) plans. Defined contribution plans, the comptroller said, are not adequate to replace defined benefit plans. “The reality is that 401(k)s were never intended to take the place of pensions,” DiNapoli said.

According to DiNapoli, recent market turbulence is a reminder of the “inherent instability of 401(k)s and how daunting it can be for individuals with 401(k)s to navigate their way to a secure retirement…If that’s not enough of a reason to be wary of moving from pensions to 401(k)s, according to the National Institute on Retirement Security, defined benefit plans cost 46% less than individual 401(k) style savings accounts”

While most strategic asset allocations confuse strategic asset allocation with static asset allocation, resulting in embedded risk, a dynamic beta program allows innovative investors to lower drawdown, a new report asserts.

(December 15, 2011) — A new report is championing the value of a dynamic beta strategy in portfolios to better manage risks.

The paper claims that a well-designed dynamic beta program can lower the overall risk of a fund — where risk includes volatility of returns — while earning a positive return.

The report — by Timothy B. Barrett, the chief investment officer at Eastman Kodak, Donald Pierce and James Perry of the San Bernardino County Employees Retirement Association (SBCERA), and Arun Muralidhar of AlphaEngine Global Investment Solutions — asserts: “A dynamic beta program implemented through an overlay and customized to each investor’s needs can help manage portfolio risk from an asset-only perspective or an asset-liability perspective. The introduction of dynamic beta provides substantial improvements for traditional investment portfolios as well as portfolios with risk-parity approaches and allocations to alternatives…The simple dynamic beta program alters outcomes by managing the tails. Traditional tail risk hedges involve buying expensive out-of-the-money options. But tail risk management can be achieved less expensively through the dynamic beta program.”

The main thrust of the paper is that most strategic asset allocations confuse strategic asset allocation with static asset allocation, resulting in embedded risk. “In short,” the paper concludes, “investors that engage in the development, implementation, and execution of dynamic beta programs can get paid to manage risk.” The paper demonstrates how San Bernardino County Employees Retirement Association successfully employed such a program since 2006 within the context of their rebalancing program and focuses on the importance of governance, clear assignment of responsibility, provision of sufficient resources to staff to engage in these activities and effective monitoring in generating such results.

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According to Muralidhar, all other strategies, whether buying put options on equity, buying tail-risk hedges, or selling equity to buy long-duration fixed income, are unwise strategies as you pay hefty fees to de-risk. “You pay the manager/broker who provides this product and you pay with guaranteed higher contributions in the future,” he said.

Consulting firm Wilshire Associates has echoed many of the findings by Barrett, Pierce, Perry, and Muralidhar, recently releasing its own report on dynamic asset allocation, referencing the strategy as a “game plan for systematic de-risking of corporate defined benefit plans.”

Wilshire’s report says: “Defined Benefit plans, along with all other investors, have suffered through two of the worst bear markets in our country’s history, with barely five years between them…Dynamic asset allocation is a strategy for reducing the volatility of an investment portfolio as its relationship to promised liabilities improves. A dynamic plan also helps decision makers consider and balance the link between reduced risk and expected costs. Despite the rather straight-forward approach to the strategy outlined above, managing a dynamic asset allocation is far from easy and, as the name suggests, economic and investment conditions are ever changing so that implementing the plan is a fluid process.”