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MINDSETTER™ Ted Siedle: News from the State Pension is All Good

Monday, August 05, 2013

 

Folks, rest assured that the pension reform which Treasurer Raimondo championed in Rhode Island and has proposed as a national model is proceeding 100% on course. True, the pension has massively underperformed (11%) the market (22%); however, the good news is that the state has successfully eliminated the “risk” that the fund’s investment performance will ever meet or exceed the market. There’s no way this pension is ever going to soar.

If that sounds bad to you, you just don’t get it. Let me recommend Raimondo’s course in financial literacy for high school students. In the opinion of the experts the pension is paying dearly, $770 million in losses resulting from underperformance of investments is a small and acceptable price to pay to reduce pension portfolio volatility.   

Hiring dozens of these high-cost alternative managers—more than the pension has in history—also provides excessive diversification, further eliminating the “risk” the pension might ever match or trounce the market. Again, if that makes no sense to you, you just don’t get it.

The Treasurer’s dream of reducing pension volatility and risk through hiring dozens of high-cost, high-risk hedge fund managers is already coming true. You’re in high cotton, Rhode Islanders.

Here’s an easy way to think about this: Bad (performance) is, in fact, good.

Trust me, the contracts the pension now has in place with hedge fund and alternative money managers (contracts which it has promised the managers to withhold from public scrutiny) will serve to ensure less volatility— i.e., consistent underperformance—in the years to come.

Last week, when the Treasurer’s office disclosed fiscal year end investment performance related to the pension, some questioned how she could possibly know with certainty net investment performance while claiming not to know the fees the pension paid its alternative money managers.

As she has said before, the fees the pension pays money managers (even if she did know the amounts) don’t matter—only future performance. 

When the complete fee information is finally disclosed by her office, perhaps sometime in September, Rhode Islanders will be reminded of the old adage: You get what you pay for. Consistent underperformance (which is, according to the Treasurer, “good”) almost always comes with a hefty price tag. If that sounds loopy, you just don’t get it.
Repeat after me: High fees are good, low fees are bad.

But there’s more good news. Fortunately for Rhode Island taxpayers (at least in the short-term), the high price of the Treasurer’s pension reform is being paid by participants in the pension through elimination of their 3% COLAs. More money for Wall Street is good; workers’ benefits are bad.

One final bit of good news: massive pension underperformance and paying huge pension fees to Wall Street hasn’t hurt the Treasurer’s campaign fundraising efforts. According to published reports, she has garnered more contributions that any candidate in Rhode Island history.

Yes, indeed, pension reform is working exactly as intended in Rhode Island.


Edward "Ted" Siedle is a contributor to Forbes.com and is President of Benchmark Financial Services, Inc. You can follow him on Twitter @edwardsiedle

He is a regular Guest MINDSETTER™ to GoLocalProv.

 

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