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Another Tough Year For CalPERS As Retirement Fund Loses Billions

edited July 2016 in Technical Questions
FYI: Public workers are pumping more money into retirement funds. Public agencies are pumping more money into retirement funds.

Yet the market seems distinctly unimpressed.

The California Public Employees Retirement System – the nation’s largest – lost about 2 percent of its market value in the fiscal year that just ended, according to unofficial numbers published last week on the CalPERS website. This came despite doubled-down efforts to beef up its bottom line.


  • Tax increases are baked in the cake for Californians. The politicians have been using 7.5% as the return rate for CalPERS funds and the unfunded liabilities are mounting. There is only one place to get funding to pay extravagant government retirements, from taxpayers.
  • CalPERS's unfunded liabilities are serious problem, and there is not an easy way to resolve it without re-negiate the payout rates to these government retirees.
  • "...An independent report from Wilshire Associates in Santa Monica, a CalPERS consultant, warned that forward-looking assumptions are quite low but cautioned CalPERS against taking chances to try to regain ground. “While the reduced portfolio return expectation vs. three years ago could encourage additional risk-taking in an attempt to maintain a higher expected return, such action would seem contrary to the committee’s long-term plans for portfolio de-risking,” it said."
  • edited July 2016
    As a university faculty member in an east coast university system, after 7 years, I'm still glad I elected the 403(b) option at TIAA CREF versus the state pension ... the entire account is parked in the very low-cost and high-quality AF WaMu R-6.

    Why not go the traditional pension route? Not only don't I trust state pension/investment boards (or their political masters), but if 'my' investments are going to gain or lose money, as a fairly knowledgeable/competent investor I want to be the one responsible for it happening.
  • Took my traditional, defined-benefit plan pension early. The lesser of two evils. ;) I cannot fathom how so many folks will ever be able to retire, having been stripped of a shot at a trad. pension, and being forced to go into a defined contribution plan.
  • MJG
    edited July 2016
    Hi Guys,

    Indeed CALPERS has had a rough year. But that's not extraordinary. It's more the rule than the exception. Over the last 20 years, that agency has underperformed the equity markets in just about that entire timeframe.

    As an investment agency CALPERS is a disaster. Why? They spend almost 50 million dollars each year in fees and hire about 275 "expert" consultant and advisor teams. It's certainly not that they aggressively pursue and deploy active managers. They do and have for years without outdistancing a poor man's portfolio.

    There's a significant lesson embedded in those disappointing outcomes. It's not easy to even match the marketplace when attempting to add some Alpha. Even very smart guys with a deep bench are not often up to that challenge. An alternate strategy is obvious. Warren Buffett advocates it for his surviving family members.

    Best Wishes.
  • I do find it a bit unsettling that after so many companies have replaced their Defined Benefits Retirement Plans with Whatever Market Brings Plans, expected 10 year real returns on equities and fixed income assets are zero.
  • More pathetic, the clowns running many of these funds/programs are suckered by the allure of hedge funds, private equity, and other costly black boxes that eat up their returns after expenses and fees ... and then they worry when their projections, such as they are, aren't met. Sadly, though, few if any of those who invest in these products seem to ever get held accountable for their actions.

    Meaning, it's definitely a goo thing to see some places scaling back or eliminating their hedge fund / PE holdings, to be sure.
  • For years my husband had a Fidelity 457 plan. It was cheap if we wanted it to be. It allowed a large array of choices of Fidelity funds and had a brokerage window. We did fine with it. Now the plan is being moved to Voya with no information forthcoming on the plan and only the promise that it's better, just trust us. It appears there will no longer be cost sharing outside of a few core funds and that all fees outside this core will fall 100% on the employee. This happened out of the blue and we were notified with 2 months to decide if we will allow our money to be moved to the Voya Vacuum or we will roll it over and risk the loss of legal protection that might ensue. The employees had no choice in this and, of course, they are saying Obama made them do it with new fiduciary regulations. One current employee said that Voya might send "advisors" to roam the halls giving advice. I had that once in the University of Texas system. A type A guy seemed to think that getting people to churn their investments was a full time job. When I left the system, he seemed to think the best advice was to roll it all into a VALIC money market.
  • Anna , you answered your own question.
    Roll it over & assume the risk of legal protection. For a small sum you can purchase a liability insurance policy.
  • rforno said:

    Why not go the traditional pension route? Not only don't I trust state pension/investment boards (or their political masters)
    More pathetic, the clowns running many of these funds/programs are suckered by the allure of hedge funds, private equity, and other costly black boxes that eat up their returns after expenses and fees ...

    Let's be clear here. Public, private - doesn't matter. It's not a matter of devious politicians. Private companies use the same hedge funds, private equity, and other costly black boxes, albeit in different mixes. While they tend to allocate less to alts than public pensions, they still invest significantly, and they allocate more to hedge funds than do public pensions.
    Deutsche Bank’s [December 2015] survey data [] showed that ... Public pension funds had a median 29% allocation to alternatives and 7% to hedge funds; private pension funds, 17% and 10%, respectively; and sovereign wealth funds, 13% and 5%.

    All of that was nevertheless peanuts compared with endowments and foundations, which allocated 48% to alts and 23% to hedge funds (ibid.)

    Performance? Here too, politics doesn't seem to be what matters. From Private Pension Plans, Even at Big Companies, May Be UnderFunded Floyd Norris, NYTimes (2012):
    The companies in the Standard & Poor’s 500 collectively reported that at the end of their most recent fiscal years, their pension plans had obligations of $1.68 trillion and assets of just $1.32 trillion. The difference of $355 billion was the largest ever, S.& P. said in a report.

    Of the 500 companies, 338 have defined-benefit pension plans, and only 18 are fully funded. ...

    The main cause of the underfunding at many companies does not appear to be a failure to make contributions to the plans. Instead, it reflects the fact that investment markets have not performed well for a sustained period.
    Virtually all pension funds had assumed returns would be better, leaving them underfunded when their investments failed to perform as expected.
    Finally, consider that companies often raided their private pension plans to inflate their profits.
    in the 1990s corporations used a variety of accounting techniques, tax incentives, and other forms of manipulation to syphon money from pension plans and serve corporate purposes. [E.E. Shultz] provides an example called the “accounting effect,” where a company could reduce benefits by hundreds of millions of dollars and record the change as a profit. This practice benefited corporate executives, who were compensated by reaching certain profit targets, and shareholders, but in many cases workers and retirees, subjected to this deception and fraud, were cheated out of retirement income.

    As Norris stated, the problems now are due largely to many years of poor market performance - which affected your DC returns just as it affected DB plan (public or private) returns.

    As a footnote, I gather that Vanguard would be counted among the so called "clowns". It created VASFX (alts) for pensions, endowments, foundations, and to use in its managed payout fund (VPGDX) - in some ways the closest thing Vanguard has as the retail level to a pension.
  • MSF I was speaking specifically about government employee pensions, which as you noted, are in many cases woefully underfunded and (I believe) also are subject to raiding by politicos for other 'more pressing' needs in their states. As for me, I'm in the accumulation stage and not using the pension plan, throwing my regular contributions into an equity mutual fund.

    Were I in charge of a pension plan that 'needed' an alternatives fund I likely would take a Vanguard "alt" fund over any hedge fund or PE offering, if for no other reason than costs.

  • MJG
    edited July 2016
    Hi Guys,

    Only on rare occasions does my wife read my posts. That’s too bad since her IQ is two standard deviations higher than mine, and her reviews often generate constructive suggestions. That didn’t happen in my earlier post which she has subsequently read and has identified some shortfalls. Based on her critique, here are a few additional thoughts on the topic.

    I was far too circumspect in getting to an Indexing investment approach. And I only cited Warren Buffett as an Indexing convert. He is just one from a pantheon of famous, skilled financial professionals who have changed horses, and now endorse Index investing for a major portion of most individual investor’s portfolios. Charles Ellis and David Swensen are two other excellent examples.

    In the Charles Ellis case, it is not a recent conversion. My wife reminded me of an article that Ellis wrote in 1975 that made the argument using mostly sports analogies. The published work is only a short 7 pages. Here is a Link to that pioneering piece:

    Please give it a visit. It is a breezy piece of work with many familiar, understandable analogies – some even appropriate in today’s investment world. Enjoy.

    Even at that early date, Ellis argued that investing had morphed from a Winner’s Game to a Loser’s Game because of the fact that well trained and well financed professionals were now competing against their equals rather than against much less informed amateurs. Ellis was still singing the same song when he updated his “Winning the Loser’s Game” book in 2010.

    David Swensen wrote a nicely reasoned forward for that edition. He became a more recent convert while planning his “Unconventional Success” book. He changed horses when preparing the text for that volume. He realized that “The overwhelmingly large number of investors should seek membership in the passive management club”. That realization prompted him to completely reorganize his work in progress. Private investors can not practice what Yale does with its portfolio.

    Investment advice comes in many colors and in as many flavors. Choosing to disregard most of it while accepting a small fraction is a difficult challenge. Getting similar advice from such financial lions as Buffett, Ellis, Swensen, and other industry superstars makes the decision a little easier.

    In the end we always get to choose. To choose wisely is yet at another level. Good luck to all.

    Best Wishes.
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