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LATEST POST 5/10/08
7/9/07
How Much Money We Talkin' 'Bout?
This is a reasonable first order estimate...
Here's a BIGCHARTS.COM chart showing the past ten years performance of:
1) A McMorgan stock fund
(mcmex) representing the performance of the equity portion of our pension funds from '93 to 2005.
and
2) The
different mutual funds which became available to our 401a in 2004.
Three sets of questions.
1)What did it cost us to be undiversified with all our equity exposure
in both the 401a and the main pension fund limited to one manager and one portfolio?
We can do a quick first order
estimate from the charts that our equity return from McMorgan was roughly eight percent over the period of mid 1997 to 2005,
or about 1% per year. If we had $60 million in the main pension fund invested in equities in '97, that would have given us
about $68 million on our original principal plus earnings after 7-1/2 years .
The worst performing fund of the group
of funds now available to our 401a managed about 20% return during that period, and the best performing fund did about 150%.
Again assuming $60 million in pension equity funds and a conventional distribution of the pension monies among funds as shown
below and the rates of return on the funds as shown above, we would have had roughly $38 million in earnings as shown below.
Or stated another way, we would have had a 65% return instead of a 8% return (eight times better) in both the main pension
and the 401a Supplemental pension, with much better diversification and safety. It appears to me as though a case could be
made that the cost of an undiversified investment strategy and reliance on a single poorly performing investment manager is
approximately 50% of the amount in your 401a and the defined benefit pension fund. This is only an estimate and a rough one
at that. It only tallys a fixed amount of funds and ignores ongoing contributions into the defined benefit fund and the
401a accounts, but it certainly justifies looking more deeply into this issue.
2) Given that the stock funds that the Board of Trust made available to us in 2004 to replace the poorly
performing McMorgan Funds were available to us in 1997, why did it take so long to diversify from a single advisor for both
stocks and bonds and both the 401a and the main pension? Was this a matter of a single decision being made in 1993 without
any subsequent review? Was it consciously and deliberately kept this way? Was this a prudent course of action and fiduciarily
responsible? How were these things managed and are they being properly managed now and will they be managed in the future
for our interests?
3) What assurance do we have that this is not happening again? As of 2004 we have a new investment
arrangement in the 401a Supplemental Pension Plan and as of 2005 we have a new arrangement in the Primary, ie Defined Benefit
Pension Plan.
Did we choose two severely underperforming investmemt management firms and an unacceptably high cost
index fund manager for the defined benefit? Will the 401a arrangement pass review?
All good questions.
Finally,
food for thought; Did the godawful 401a pension performance during the late 90's and early 2000's keep you from allocating
more than the minimum amount to the 401a? Did the pension plan's sticking with an underperforming equity manager cost you
while they were in place and is it still costing you even after they are long gone from the 401a?
7/15/07
How Much Money We Talkin' 'Bout? Part II
This is a way conservative estimate...
Here's a BIGCHARTS.COM chart showing the past ten years performance of:
1) A McMorgan stock fund
(mcmex) representing the performance of the equity portion of our pension funds from '93 to 2005.
and
2) A selection of Vanguard mutual funds that represent stock indexes. Index investing is what
you do when you decide that selecting a good investment manager is too much work and you would rather give up any hope
of beating the market as represented by an index in trade for never lagging behind the index. It is very reliable (your
investment IS the market) and cheap (There is no research, you look up and buy and sell the index; $8 a trade
for $50,000,000 the last time I asked).
Three sets of questions.
1)What did it cost us to be undiversified with all our equity exposure
in both the 401a and the main pension fund limited to one manager and one portfolio?
We can do a quick first order
estimate from the charts that our equity return from McMorgan was roughly eight percent over the period of mid 1997 to 2005,
or about 1% per year. If we had $60 million in the main pension fund invested in equities in '97, that would have given us
about $68 million on our original principal plus earnings after 7-1/2 years .
The worst performing fund of the Vanguard funds managed about -40% return during that period, and the
best performing fund did about 84%. Again assuming $60 million in pension equity funds and a conventional distribution of
the pension monies among funds as shown below and the rates of return on the funds as shown above, we would have had roughly
$15 million in earnings as shown below. Or stated another way, we would have had a 25% return instead of a 8% return (three
times better) in both the main pension and the 401a Supplemental pension, with much better diversification and safety. It
appears to me as though a case could be made that the cost of an undiversified investment strategy and reliance on a single
poorly performing investment manager is approximately 25% of the amount in your 401a and the defined benefit pension fund.
This is only an estimate and a rough one at that since it ignores the regular contributions during the 7 year period, but
it certainly justifies looking more deeply into this issue.
2) Given that the Vanguard funds were in large part available to us in 1997 and they were all available
by mid 1998, why did it take so long to diversify from a single advisor for both stocks and bonds in both the 401a and the
main pension? Was this a matter of a single decision being made in 1993 without any subsequent review? Was it consciously
and deliberately kept this way? Was this a prudent course of action and fiduciarily responsible? How were these things managed
and are they being properly managed now and will they be managed in the future for our interests?
3) What assurance
do we have that this is not happening again? As of 2004 we have a new investment arrangement in the 401a Supplemental Pension
Plan and as of 2005 we have a new arrangement in the Primary, ie Defined Benefit Pension Plan.
Did we choose two severely
underperforming investment management firms and an unacceptably high cost index fund manager for the defined benefit pension?
Will the 401a fee arrangement pass review?
All good questions.
Let's ask a few more of them. There are ten members of the Board of Trust of Local 342. Between 1997 and
2007 they apparently left on the table tens of millions of dollars that could have gone to Local 342 members. If they had
been Sunday Newspaper Smart (How is our money really doing? Is our advisor being honest with us? Have we set and
met benchmarks? Are we doing as well as we could/should be? Are we properly diversified?), say by looking at how we were doing
versus what the indexes/Vanguard Funds/other Locals in the area and US were doing, we might have at least $10,000,000
more in the defined benefit pension fund. If they'd gotten serious about managing our money responsibly ten years ago instead
of three years ago, say by doing the things listed above and then picking good money managers for the defined benefit
and 401a Supplemental Funds, we could easily be up well over $30 to $50 million dollars in the defined benefit
fund and each have double the money in the 401a accounts as shown in the example above dated 7/9/07. What needs to be done
to prevent this from happening again?
More food for thought; Did the godawful 401a pension performance during the late 90's and early 2000's keep
you from allocating more than the minimum amount to the 401a? Did the pension plan's sticking with an underperforming equity
manager cost you while they were in place and is it still costing you even after they are long gone from the 401a?
8/5/07
Collateralized Debt Obligations (CDO's)
Mortgage Backed Securities
(MBS)
Residential MBS's (RMBS)
Commercial MBS's (CMBS)
Don't know what these letters mean? Check out the COFGBLOG ESSAYS page for a primer.
These "fixed rate securities" are in the news big time. They are at the root of the lockup of the bond
and fixed rate markets and they are at the root of the August stock market free fall. Two Bear Stearns hedge funds
lost all their investor's money by investing in mortgage backed securities. A third Bear Stearns hedge fund is in trouble
and the continued viability of the whole Bear Stearns company is on the table as this is being written. Other hedge funds
are rumored to be trying to dump their MBS's but nobody is buying and still other hedge funds here and overseas have been
sold under duress or bailed out, further cratering the market for the securities. Nobody knows where the damage will stop
and what the ultimate cost will be. (As I write this, A London hedge fund has gone down in flames, a German Bank was bailed
out by the German government because of American MBS's, and the French government has frozen two investment funds with
underwater subprime MBS's, cratering the US stock market yet again today. No shit no one knows how
bad this is and where this is going to stop. But a few years out to hit and bump along the bottom looks like a good bet.
Do we have these mortgage backed securities in our pension plans?
Yes We Do.
As of the middle of last year, we had a sizeable position in mortgage and asset backed securities
in our Pension Trust Fund (18% of the fixed income position), our Supplemental Pension Plan (24% of the fixed income
position in the default fund), our Health and Welfare Trust Fund (27% of the fixed income position), and our Apprenticeship
and Training Trust Fund (27% of the fixed income position).
I have not seen the most recent report, but I think a reasonable estimation of the current make up of the
above named funds can be made from other sources that are available to me.
The basis for the fixed income position for three of the above named funds are
the McMorgan Fixed Income Fund and the McMorgan Intermediate Fixed Income Fund. The Supplemental Pension Plan has it's default
account bond investments in the McMorgan Fixed Income Fund and the Health and Welfare Fund and Apprenticeship Training
Fund fixed income investments are through the McMorgan Intermediate Fixed Income Fund.
According to the latest filing available from McMorgan's website, the McMorgan Fixed Income Fund is
38% in mortgage backed securities. The McMorgan Intermediate Fixed Income Fund is 42% in mortgage backed
securities. Note that at a time when the headlines in the news are about the downturn in real estate and the hazards
of mortgage backed securities, we have increased our holdings in mortgage backed securities by approximately 50% in
our three of the four Funds/Plans discussed here. I see no reason to believe that we have not had a concomitant increase
in the percentage of mortgage backed securities in the fourth fund, our primary pension fund.
There are some very serious questions that must be asked;
The questions are;
Do we hold any subprime mortgages?
Do we hold any ALT A mortgages?
How many mortgages are the most recent and hazardous 05-07 vintages?
Do we hold subordinate mortgages? Do we hold seconds or are there lines of credit on top of the mortgages
we hold?
How will defaults be handled?
Are we exposed to a hedge fund caused "death spiral" in CDO's?
Why such a huge increase in concentration in one investment sector over one year?
Whose interests were best served by holding a concentrated position in mortgage securities?
If bond holders have first call on the assets of a distressed corporate situation, what is our recourse
on a collateralized debt obligation or MBS?
Who works defaults out and what are the priorities?
Do we hold these instruments directly in the Pension Trust Fund?
Is our CDO risk greater or lesser where we are invested in a McMorgan Fund rather than directly invested
in mortgages?
What is the current risk profile and how has it changed over the last year?
Have the mortgage backed securities recently lost value and if so, how much?
10/2/07
There is no security on this earth, there is only opportunity."
--General Douglas MacArthur
A hugely significant event has occurred in our 401a plan. This event is absolutely the most important occurance
I can imagine for many of the younger members. It is, however, without real significance to me and to many of the older members.
Here's what's goin' down; The default plan for our 401a has been the Balanced Pooled Fund. See all over this site....This
is a gawdawful choice for many people. A brand new apprentice/journeyman contributing to the B/P Fund starts off his investing
in a vehicle that is 60% bonds.
Kinda.
Actually I suspect he is investing in a 60% bonds/mortgages vehicle.
Bummer. He has some security, maybe, which is always nice. But he barely (maybe) breaks even with inflation in bonds.
And,
it's not that the jury is still out...we don't even know if there is going to be a jury when the CDO (collateralized debt
obligation[subprime/subslime mortgages]) riff finally gets laid down so it stays there. I just don't have the time here to
cover this here and now. But I will, elsewhere and later. Stay tooned."
So the young member doesn't make much
in the B/P Fund. That's not good. You wouldn't keep your life savings in an interest free savings account... But look up the
returns for the 401a bond funds over the last five years. Again, Bummer.
The older member, retired or ready to retire,
who has his 401a invested in the B/P Fund, has his 401a savings and earnings in a vehicle that is 40% stocks. Stocks can make
you rich and can beggar you...sometimes a coupla times each in the same year. That's called volatility. Why would anyone set
up an older member's savings where 40% of the money was on cruise control in a risky investment? Yet that happens to be the
case for older/near retirement or retired members, who have all his or her money in the B/P Fund.
So what is needed
for Local 342 members is a no hassle/easy/low/maintenance/automatic/rational way to allocate his (or her) funds properly between
stocks and bonds, as driven by the member's age and retirement target date. The answer is...
The American Funds
Target Date Retirement Fund
At the special called State of the Pension Funds Meeting in November of last year,
I suggested that we try to put something like this into place... and it has come to pass.
It's About Time!!!!
Of course,
my son has had this kind of fund available to him for at least the last seven years at the last two places where he has worked/works.....
But better way late than never.
This is a quantum leap or two better than the B/P Fund and all of the younger members
need to check this out.
It is NOT the answer for everybody and it is not the answer for me. And it may not do much
for the older members. But it is a DAMN FINE THING THAT THE BOARD OF TRUST HAS DONE. They just needed to be pointed in the
right direction and motivated....
The problem (yeah, for all my enthusiasm for the target date funds, there still
is a problem...) is that we hemmoraged away money in the 401a and defined benefit plan under the previous financial advisors
and participating in the Target Date plan won't help that. But it will get the members who are very new or those who are close
to retirement and have a nice nest egg into a more rational allocation plan.
And there are still risks... The Board
of Trust added four new financial advisors in 2004 and within a year, two of them were on notice for crappy performance. Not
that it was any different from what they had been doing previously and that the Board of Trust had blessed the previous year...
But still... the Target Date Funds appear to answer a major need. So I'll be vigilant.
So, bottom line, I'm stoked!.
But I've been down this road before... Lemme see about tracking this and getting back to you... Stay tooned...
Oh,
yeah...Fixing the damage done to my pension savings is another matter. And one that I'm addressing presently with my 401a.
The godawful performance of our prior 401a plan discouraged me from bumping my contribution to the plan. So I'm late taking
advantage of the 401a. But now I've got something I can work with and I've got my head down and I'm doin' it. You should make
sure you are doing the right thing for your personal circumstances too.....
THAT'S WHAT I'M TALKIN' 'ABOUT!!!!!
See
ya at the hall.....
5/10/08
You should have received your pension statement recently. Check out your numbers against what a
IBEW and a Sheetmetal Local working in our area provide for their members...
The quick and dirty analysis is as follows;
I've worked 34 years as a steamfitter. I've got $2,600 a month pension to show for it.
A friend who is an electrician had earned a $3,900 a month pension by the time he had worked 19 years.
A friend who has worked 18 years as a sheetmetal hand has a $4,100 a month pension.
The electrician averaged about $240 a year pension credit for a full time year between 1996 and 2005.
In 2005 he paid in $7,700 for a $223 monthly benefit.
The sheetmetal hand has averaged about a $250 monthly benefit credit over the last 18 years.
In 2007 he paid in $13,000 for an almost $300 a month pension credit.
From 1994 to 2004, a full year of work earned me about $120 pension credit a year. This year I
paid $12,900 for a $210 pension credit. Most members earned about $160 for the same contribution.
Given that fuel and food inflation has been triple ugly nasty recently and no one with any credibility can
come up with any kind of scenario where it gets better in the near future, and, given that we don't have a cost
of living adjustment on our pension, you have to realize that the value of our pension is going down as fuel and food
prices go up. For those currently drawing a pension, it is steadily going away, never to return. Those still earning their
pension are spending too much of their contribution attempting hold their own against inflation and not enough getting
ahead.
Luckily for our union brothers and sisters in other locals, the high returns earned on their pension contributions
will stand them in good stead in their retirement years as they have a chance to maintain their lifestyle against inflationary
pressures. I'm not so confident about my pension and that of my own local's brothers and sisters.
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