Article

Protecting State and Municipal Pensions

Public pensions are a go-to business and government story here in Connecticut, with headlines tending to gravitate toward the budget line items, political rhetoric and unfunded liabilities typically associated with defined benefit plans (DBPs).

Learn More
< Back to Insights
Insights  <  Protecting State and Municipal Pensions

Public pensions are a go-to business and government story here in Connecticut, with headlines tending to gravitate toward the budget line items, political rhetoric and unfunded liabilities typically associated with defined benefit plans (DBPs).

Public pensions are a go-to business and government story here in Connecticut, with headlines tending to gravitatetoward the budget line items, political rhetoric and unfunded liabilities typically associated with defined benefit plans (DBPs).

Aside from being able to measure DBP health against industry standards—like 80-95% asset maintenance—reporting of DBPs has another important consequence: the scrutiny, and second-guessing, that comes with decision-making in the public sphere.

Conversely, defined contribution plans (DCPs) in the form of government-sponsored 457s and 403(b)s—which deploy voluntary pensioner contributions but lack reporting on financial statements and balance sheets—tend to fly far under the radar. The upshot is less scrutiny and, perhaps, less incentive for the fiduciary to drive a hard bargain. A 2012 Forbes article went as far as to call DCPs the “Wild West” of pension investing.

Local and state governments charged with making decisions in the best interests of participants in DCPs need to understand how they work and need to ensure affordability in the fees and expenses that come with them—in particular, they need to provide an accurate accounting of how these fees affect their account balances.

DCPs are often treated as an adjunct to the pension viability conversation. However, pension and investment committees would be wise to watch DCPs closely for two different reasons: 1) the potential DCPs hold in easing some pension burdens, and 2) a quiet trend towards litigation in cases where DCP administration oversight may have been neglected. In particular in the second instance, the Coalition of Mutual Fund Investors (CMFI) recently identified a number of court cases involving “excessive investment management fees,” so this does need to be monitored.

In terms of public policy, DCPs are a step in the right direction for overburdened systems. If administered thoughtfully, DCPs can bolster worker retirement savings and combine it with something DBPs generally do not—the future retiree’s engagement in choosing how contributions are invested.

The Government Finance Officers Association (GFOA), a professional association of state, provincial, and local government finance officers in the U.S. and Canada, has identified steps that plan sponsors need to take to ensure DCPs are affordable and participants are given access to the information they need. According to GFOA Best Practices, these steps are:

  1. Thoroughly review and document the process used in selecting DCP service providers and the types and amounts of fees they charge.
  2. Review and verify actual fees at least once a year to make sure the provider is not overcharging.
  3. Provide plan participants with meaningful and accessible information about fees and expenses at least once a year, along with other information participants need to make sound investment decisions.

On the other hand, a string of class action litigation—involving administrator heavy hitters like Nationwide, MassMutual, and New York Life—bears watching. Among other things, the suits assert pensioners were subject to exorbitant transaction and maintenance fees, driven by too many investment options. Understaffed human resource offices may not have the resources or expertise to help pensioners navigate their options.

Public pension committees should ignore the warning signs of DCP litigation at their own peril. A better approach would be to:

  • Shore up human resource training to serve as a day-to-day check on plan administration;
  • Commit to ongoing, transparent communication of participant costs, delivered in writing and via regular pensioner meetings;
  • Periodically review fee structures, to make certain costs are not artificially inflated by unwieldy plan choices; and,
  • Consider a third-party audit of plan administration, where savings can be identified.

In these uncertain budget times at all levels of government, DCPs hold promise as a savings tool for worker retirement, if fiduciaries are vigilant in their role as gatekeeper. For some, delegating details to plan administrators and putting their DCP on autopilot may be in line with past practice. The spate of recent lawsuits, however, would suggest elevating efforts around DCP administration is a worthy investment.

Vanessa E. Rossitto, CPA, is a partner with BlumShapiro and leads its Government practice. BlumShapiro is the largest regional business advisory firm based in New England, with offices in Connecticut, Massachusetts and Rhode Island. The firm, with a team of over 500, offers a diversity of services, which include auditing, accounting, tax and business advisory services. Blum serves a wide range of privately held companies, government and non-profit organizations and provides non-audit services for publicly traded companies. To learn more visit us at blumshapiro.com.

Continue the Conversation with Our Team
Get in touch with us.

Contact Us