Under both federal (ERISA) and state law pensions are supposed to be managed for the “sole or exclusive benefit” of beneficiaries—participants such as you. Yet forensic investigations reveal that our nation’s public pensions are never managed for the sole or exclusive benefit of participants.
So, if your government pension is not managed for your exclusive benefit, for who’s benefit is it being managed?
Recently, the Illinois Retired Teachers Association asked me to provide its members with my opinions regarding management of our nation’s public pensions generally, as well as the Illinois Teachers Retirement System. Below is a summary of my comments.
Who Am I To Call Into Question Management of Our Nation’s Public Pensions?
Since the information I will be giving you today largely conflicts with almost everything you’ve ever been told about the Illinois Teachers Retirement System by its trustees, administration and investment staff, as well as the hundreds of costly Wall Street firms paid to manage your retirement savings, I think it’s best to start out by giving you a brief summary of my experience and credentials.
After all, who am I to call into question what’s been happening at your pension over the past few decades? Why should you believe anything I—a single individual—has to say that disputes what you’ve been told by hundreds of investment professionals employed by your fund?
At the outset, let me say I first became familiar with the Illinois Teachers Retirement System approximately 30 years ago, in 1990, and have known many of the individuals and firms involved in its scandal-ridden past. Over a decade ago, I recommended crowdfunding a forensic investigation into the pension’s investments—an investigation it seemed no one wanted at that time. I even discussed with your former Attorney General a proposal to investigate all Illinois public pensions targeting obvious corruption and to improve their operations.
That proposal went nowhere—slowly.
Likewise, as first reported in the New York Times
For the past 40 years I have pioneered the field of forensic investigations of retirement plans and have successfully conducted investigations involving well over $1 trillion in plans. Don’t let these past successful investigations fool you—overwhelmingly the parties involved with pensions, including politicians, board members, pension administration and staff, Wall Street and even unions—oppose investigations into the increasingly secretive world of public pension investments.
Yes, even groups that are supposed to represent the interests of workers and retirees—such as unions—often believe that exposing wrongdoing undermines public pensions.
I believe just the opposite: The best way to ensure the sustainability of public pensions—to protect public pensions—is to eliminate waste, fraud and other forms of mismanagement.
My hope is that everyone receives the retirement benefits they have been promised, including cost of living adjustments and health care benefits that are under attack nationally.
It may surprise you to learn that all the investigations I have undertaken to date have concluded that the main reason public pensions, such as yours, are significantly underfunded has little to do with how much money is paid into the pension or paid out in the form of benefits.
The leading cause of pension failures is mismanagement of investments—what I call “gross malpractice generally practiced.” Even a 1% annual waste can result in loss of 30 or more percent of a pension’s value. So when you hear that public pensions are, on average, 30% underfunded (or 70% funded) think: 1% squandered annually over 30 years explains the shortfall.
I have written two books detailing my investigative findings: Who Stole My Pension? How You Can Stop the Looting, is a bestseller co-authored with Robert Kiyosaki of Rich Dad, Poor Dad fame. I understand many of you reviewed copies of our pension book in preparation for this presentation. My second book, How to Steal A Lot of Money—Legally, is a novel approach to financial literacy inspired by actual events and incorporating decades of asset management forensic insights.
In conclusion, hopefully I have convinced you that my insights and opinions are at least as credible as those of the army of costly Wall Street experts hired by your pension—and paid handsomely with your hard-earned savings.
Your Pension Is Not Fully Protected Under Law or By Law Enforcement
Many of you have heard of the Employee Retirement Security Act (ERISA) and may be aware that this comprehensive federal law protects private-sector pensions. ERISA does not apply to state and local government pensions, such as your own. As a result, many of the important, substantial protections provided to private sector workers under federal law simply do not apply to your pension. Worse still, no comparable comprehensive pension protections exist under state law.
For example, under federal pension law designed to address alarming funding problems encountered by many corporate pensions, pensions less 65% funded are considered in the Red Zone for critical and must adopt rehabilitation plans designed to allow the plans to emerge from critical status within 10 years. Under the federal scheme, at 40% funded, ITRS is deep, deep within the Red Zone and has no plan to improve its operations.
Simply put: your state pension is not nearly as well-protected as corporate pensions. Don’t let anyone tell you otherwise. Further, no federal or state regulator or law enforcement agency is keen to get involved in policing your pension for political reasons we’ll discuss later.
Since public pensions are not as tightly-regulated as corporate plans, Wall Street reserves its sketchiest business deals for loosely-regulated public pensions which it refers to as “the dumbest investors in the room.” In short, Wall Street gets away with all kinds of shenanigans in dealing with public pensions—abuses which would never fly in the ERISA plan context.
Despite What the Law Requires, Your Pension Is Not Managed For Your Exclusive Benefit
While it’s true that under both ERISA and state law pensions are supposed to be managed for the “sole or exclusive benefit” of beneficiaries—participants such as you—my investigations regularly reveal that public pensions are never managed for the sole or exclusive benefit of participants.
So, if your pension is not managed for your exclusive benefit, for who’s benefit is it being managed?
Politicization of Pension Investments
That question brings us to another unique aspect of public pensions which I refer to as “politicization of the investment process.”
Public pensions are overseen, or heavily influenced by, elected officials—such as state governors, treasurers, and city mayors—who know next to nothing about pension investing yet are responsible for trillions in government workers’ retirement savings. Wall Street heavily contributes to the political campaigns of these elected officials, in hopes of being hired to manage money for the public pensions overseen by elected officials. It’s called “pay-to- play” and it used to be illegal. Now its commonplace.
So-called “alternative” investment funds, such as private equity, hedge, real estate and venture capital funds, pay Wall Street the greatest fees—tons of money which Wall Street can share with corrupt public pension decision-makers. If you want to know why public pensions in recent years have loaded up (30% or more) on the highest cost investments ever devised by Wall Street, the answer is political campaign contributions.
Your pension has long been used to further the political ambitions of local politicians—and you have paid the price.
Why? Because the highest-cost investments have in the past and indeed must dramatically underperform since they are so laden with fees and expenses. In order for a money manager charging high fees to outperform lower cost competitors on a net basis, he’s got to be that much better. It’s like running a footrace with sandbags tied to your ankles. It’s more than unlikely you won’t win.
Your Pension Is Less Transparent Than Ever
Let’s talk about transparency now—another subject discussed extensively in Who Stole My Pension? America’s public pensions are supposed to be the most transparent of all pensions in the world. Every state has public records laws—like the federal Freedom of Information Act—which are supposed to ensure public scrutiny and accountability when public monies are involved. Unfortunately, that’s not happening. Transparency at public pensions has plummeted in recent years.
Over the past 15 years or so, state public records laws have been almost completely gutted, as Wall Street and elected officials have ushered in an era of secrecy. The most damning information regarding mismanagement of your pension is now kept secret from you. Ask yourself: If my pension is supposed to be managed for my sole or exclusive benefit, how is it I’m no longer allowed to see the operative documents?
After all, it’s your money!
Just remember: While it has long been said that “sunshine is the best disinfectant,” Wall Street cockroaches prosper—and thrive—in the dark. Neither Wall Street nor your local politicians want you to see their corrupt dealings and so, they’ve agreed amongst themselves to keep you in the dark.
If you don’t believe me about this new era of secrecy, I encourage you to file public record requests with ITRS asking to see operative investment documents and see what happens. I promise you: you will not get the documents—at least not without a hell of a fight. But, as we’ll discuss later, it is still possible for you to learn a lot about these secret dealings even when the pension stonewalls you.
Other subjects you should be aware of—which I discuss in my book—include the following:
1. The people overseeing your pension (members of the board of trustees) almost universally lack investment experience, yet ignore the advice of Warren Buffett—arguably the greatest investor of all time. They evidently think they’re smarter than the Oracle of Omaha—but they’re not.
Buffett has repeatedly warned public pensions against investing in the costly alternative investments they’re loading up on today.
2. Your pension is lying about the risks it is taking with our money—it’s gambling far more than you are aware because the full extent of the gambling is being concealed from you.
3. Your pension is lying about the fees it pays Wall Street—telling you the fees are far lower than they really are.
4. Your pension is lying about its investment performance—telling you performance is better than it is. Think about it: Every state and local pension claims to have outperformed its investment benchmarks. How’s that even possible? Answer: It’s not. In my experience, all public pensions lie—inflate—their performance results.
So, if what I have been telling you is true—that is, your pension is being managed, in secret, for the benefit of politicians and Wall Street and to your detriment—what can you do about it?
My recommendation is that you commission a forensic investigation of ITRS on behalf of participants, focused upon conflicts of interest, hidden, excessive and bogus fees, fiduciary breaches and violations of law. Demand to see the pension’s investment documents.
I recently completed a forensic investigation of the State Teachers Retirement System of Ohio commissioned by the Ohio Retired Teachers Assocation. The damning findings of that investigation are publicly available and I encourage you to read the report. The State Auditor of Ohio concluded that my investigation provided a “reasonable basis” for a special investigation by his office. His findings, I am told, should be released within days.
After decades of scandalous mismanagement, it should be obvious that there is only one person who gives a damn about whether your pension is being prudently managed and that’s you.
You need to take action to protect your retirement security. Do not rely upon someone else. It’s up to you.