Serving on a Pension Board - Advice?

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Novine
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Serving on a Pension Board - Advice?

Post by Novine »

I was recently elected to the board overseeing our pension assets. As a new trustee, I'm still getting a handle on all of the responsibilities of the position. In the couple of meetings that I've attended so far, our financial advisor has talked about the "limitations of index funds" and the "opportunities available from 'alternative investments'". As you might expect, this raised some red flags for me. But being the new guy, I'm trying to listen and learn more before I start rocking the boat. Our pension fund is closed to new participants and we have a good number of retirees drawing pensions so I'm getting the impression from some board members that there's a sense of urgency to maximize returns. At this point, I'm most interested in advice from those who have served on a pension board or in a similar position and what things I can do to make sure that I'm doing my best to represent my fellow employees (along with my own pension!) and to preserve and grow the funds that we're responsible for overseeing.
chaz
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Re: Serving on a Pension Board - Advice?

Post by chaz »

Recognize that board members have a fiduciary duty to protect the pensioners and the assets.
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JamesSFO
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Re: Serving on a Pension Board - Advice?

Post by JamesSFO »

I got into this argument at a startup because the guy wanted to sell us a bunch of high-fee 401K investments vs. the Fidelity standard grouping of funds for smaller 401Ks (target funds, bunch of indexes, and a few other).

Finally we reached an agreement to disagree, I fired him and basically the CEO, CFO and myself decided that while there was a theoretical risk of being sued ultimately nobody was going to successfully sue us for having a diversified set of standard Fidelity funds with low ERs available to participants.

That said with a less agreeable CFO and CEO, I doubt I could have overcome the guy's "pitch" especially with the gloom and doom about risk.
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Re: Serving on a Pension Board - Advice?

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (pensions).
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ShowMeTheER
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Re: Serving on a Pension Board - Advice?

Post by ShowMeTheER »

Advice would be - get used to the majority being influenced by the investment salespeople. It's an uphill battle to get cost effective funds, but best of luck. Work on them slowly buy surely.
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Re: Serving on a Pension Board - Advice?

Post by livesoft »

1. Go to institutional.vanguard.com
2. In the search box, type "fiduciary" and get the list of articles and links that Vanguard provides such as https://institutional.vanguard.com/VGAp ... rybestprac and https://institutional.vanguard.com/VGAp ... aryToolkit
3. Read the articles and links
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Re: Serving on a Pension Board - Advice?

Post by jebmke »

For several years I was a corporate director as well as a pension trustee for a number of international subsidiaries. Initially I was told that I was covered by the D&O policies, when I asked for proof of coverage, I discovered that one major entity was not covered by the policy. This turned out to be an administrative oversight that was quickly fixed.

Make sure that the organization has adequate insurance to cover you in this role.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
rustymutt
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Re: Serving on a Pension Board - Advice?

Post by rustymutt »

If I wore you shoes now, I'd buy each member serving a good book on investing strategy, and ask them to please read it.
Many great books have been written by fellow Bolgeheads, and would be great read for these other folks you serve with.
You can explain to them that the book is how your perception of smart investing works. Keep cost low, and go with the flow.
Good luck!
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Re: Serving on a Pension Board - Advice?

Post by Grt2bOutdoors »

Personally, I would hire either Rick Ferri or Larry Swedroe or Bill Bernstein to give a talk on market history and realistic returns.
There is a "new found" urgency amongst private individuals and public/private pensions to increase returns - but as most things in life, the riskier your actions, the more danger. Especially, for those funds who feel the need or pressure to invest in blackboxes - like a hedge fund or private equity/venture capital fund. I've recently previewed several public companies annual reports who have defined benefit plans where they go into detail about their pension fund assumptions and I find even the most conservative of the plans have unrealistic return expectations given their current investment strategy. One of the companies who I will not name but is in the Fortune 500 maintains a 60/40 split, yet has expectations of an approximate 8% return. BTW, this plan has a significant shortfall between the accumulated benefit obligation and the projected benefit obligation. A number of these companies, even if they have frozen their plans - this particular company has, will still need to pony up significant cash to make the plan viable over the next ten years, even with these recent heady returns we've seen.
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Re: Serving on a Pension Board - Advice?

Post by Rick Ferri »

Make it your mission to educate the rest of the board. It is possible to make positive changes in a short period of time. I have seen it done by other Bogleheads who were new to boards. Also, the consultant is setting the plan up to "fail conventionally" by following the crowd into high cost alternative investments and more active management. The consultant is safe when the plan underperforms because everyone else was doing it.

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Re: Serving on a Pension Board - Advice?

Post by carolinaman »

I am a pensioner in the North Carolina state pension system. The pension AA is currently about 55% equity, 35% bond and 10% alternatives. In thier last FY. they did a nice job with equity and bonds, exceeding their benchmarks for both and their expenses were reasonable. However, they woefully underperformed in their alternatives which includes REITS and hedge funds. Also their investment costs were a lot higher in that space. I would encourage you to ask some hard questions about what they hope to achieve with alternative investments and why. It sounds like the advisor may have some financial incentive to recommend alternative investments. As others have stated, you will have the opportunity to educate other board members about proper investment strategies. Best wishes.
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Groundhog
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Re: Serving on a Pension Board - Advice?

Post by Groundhog »

Not a pension board member but some thoughts on the subject of 401K investments.

Federal employees have access to the Thrift Savings Plan as their 401K. There are only 3 stock funds available to invest in, C Fund (S&P 500 Index), S Fund (Dow Jones U.S. Completion Total Stock Market Index) and the I Fund (Morgan Stanley Capital International EAFE Index). That’s it along with 2 bonds funds (G & F) and the Lifecycle funds which are an age appropriate combination of the 5 above funds. I don’t think you hear many federal employees/retirees complaining about their options. Sure the I Fund could be a more complete international holding but you don’t have to use it. My theory is you can pick up the riskier investments outside the 401K like in your IRAs and Roth IRAs.

I would say even if you can’t keep the alternative investments or other “red flag” type investments out you can try to make sure they make available total market index funds for US and International. That along with a few bond index funds will be fine for most.
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Re: Serving on a Pension Board - Advice?

Post by Oicuryy »

Don't forget about the contribution side of plan funding. You don't really have a lot of control over your investment returns. Mostly you will get what the market gives you.

But you have a lot of control over contributions. Focus on the actuarial stuff. Getting the actuarial methods and assumptions right is more important than saving 30 basis points in investment expenses or adding 30 basis points of alpha.

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jimbojones
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Re: Serving on a Pension Board - Advice?

Post by jimbojones »

Grt2bOutdoors wrote:I've recently previewed several public companies annual reports who have defined benefit plans where they go into detail about their pension fund assumptions and I find even the most conservative of the plans have unrealistic return expectations given their current investment strategy. One of the companies who I will not name but is in the Fortune 500 maintains a 60/40 split, yet has expectations of an approximate 8% return. BTW, this plan has a significant shortfall between the accumulated benefit obligation and the projected benefit obligation. A number of these companies, even if they have frozen their plans - this particular company has, will still need to pony up significant cash to make the plan viable over the next ten years, even with these recent heady returns we've seen.
Sorry for being off topic, but these comments are really missing the mark about pension plan disclosures. The difference between ABO and PBO is that ABO uses current earnings levels while PBO uses future earnings levels. They disclose both because the employees have only earned the ABO, but are projected to get paid the PBO. Of course there will be a significant gap!

These are all accounting estimates. Concepts like expected return on plan assets are primarily in place to smooth earnings volatility related to pension returns. Nobody wants to see large income statement swings due to changes in unknown and unverifiable pension estimates.
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Re: Serving on a Pension Board - Advice?

Post by Grt2bOutdoors »

Groundhog wrote:Not a pension board member but some thoughts on the subject of 401K investments.

Federal employees have access to the Thrift Savings Plan as their 401K. There are only 3 stock funds available to invest in, C Fund (S&P 500 Index), S Fund (Dow Jones U.S. Completion Total Stock Market Index) and the I Fund (Morgan Stanley Capital International EAFE Index). That’s it along with 2 bonds funds (G & F) and the Lifecycle funds which are an age appropriate combination of the 5 above funds. I don’t think you hear many federal employees/retirees complaining about their options. Sure the I Fund could be a more complete international holding but you don’t have to use it. My theory is you can pick up the riskier investments outside the 401K like in your IRAs and Roth IRAs.

I would say even if you can’t keep the alternative investments or other “red flag” type investments out you can try to make sure they make available total market index funds for US and International. That along with a few bond index funds will be fine for most.
Why would they complain? They also have a defined benefit plan as a backup if the thrift plan doesn't work out for them.
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Re: Serving on a Pension Board - Advice?

Post by Grt2bOutdoors »

jimbojones wrote:
Grt2bOutdoors wrote:I've recently previewed several public companies annual reports who have defined benefit plans where they go into detail about their pension fund assumptions and I find even the most conservative of the plans have unrealistic return expectations given their current investment strategy. One of the companies who I will not name but is in the Fortune 500 maintains a 60/40 split, yet has expectations of an approximate 8% return. BTW, this plan has a significant shortfall between the accumulated benefit obligation and the projected benefit obligation. A number of these companies, even if they have frozen their plans - this particular company has, will still need to pony up significant cash to make the plan viable over the next ten years, even with these recent heady returns we've seen.
Sorry for being off topic, but these comments are really missing the mark about pension plan disclosures. The difference between ABO and PBO is that ABO uses current earnings levels while PBO uses future earnings levels. They disclose both because the employees have only earned the ABO, but are projected to get paid the PBO. Of course there will be a significant gap!

These are all accounting estimates. Concepts like expected return on plan assets are primarily in place to smooth earnings volatility related to pension returns. Nobody wants to see large income statement swings due to changes in unknown and unverifiable pension estimates.
So you are in agreement that a 40% underfunded plan is a sound plan? Significant or not, when you have that large of a gap there is a significant deferred liability waiting in the wings. Common equity holders should be very aware - cash that should be in their pockets will at some point be diverted to the employees pockets if that "accounting estimate" fails to close. PBO yes - based on future expected earnings levels and also projected annual return of the pension fund - I think it's ludicrous to expect a 8% return on a 60/40 mix holding 25% diversified international. I hope they are right, and I am wrong - I'm banking on a much lower return, so if they are right, it will be gravy to me. You can estimate all you want - but there seems to be a meaningful amount of ignorance out there between reality and fairytale land.
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Re: Serving on a Pension Board - Advice?

Post by jimbojones »

Grt2bOutdoors wrote:
jimbojones wrote:
Grt2bOutdoors wrote:I've recently previewed several public companies annual reports who have defined benefit plans where they go into detail about their pension fund assumptions and I find even the most conservative of the plans have unrealistic return expectations given their current investment strategy. One of the companies who I will not name but is in the Fortune 500 maintains a 60/40 split, yet has expectations of an approximate 8% return. BTW, this plan has a significant shortfall between the accumulated benefit obligation and the projected benefit obligation. A number of these companies, even if they have frozen their plans - this particular company has, will still need to pony up significant cash to make the plan viable over the next ten years, even with these recent heady returns we've seen.
Sorry for being off topic, but these comments are really missing the mark about pension plan disclosures. The difference between ABO and PBO is that ABO uses current earnings levels while PBO uses future earnings levels. They disclose both because the employees have only earned the ABO, but are projected to get paid the PBO. Of course there will be a significant gap!

These are all accounting estimates. Concepts like expected return on plan assets are primarily in place to smooth earnings volatility related to pension returns. Nobody wants to see large income statement swings due to changes in unknown and unverifiable pension estimates.
So you are in agreement that a 40% underfunded plan is a sound plan? Significant or not, when you have that large of a gap there is a significant deferred liability waiting in the wings. Common equity holders should be very aware - cash that should be in their pockets will at some point be diverted to the employees pockets if that "accounting estimate" fails to close. PBO yes - based on future expected earnings levels and also projected annual return of the pension fund - I think it's ludicrous to expect a 8% return on a 60/40 mix holding 25% diversified international. You can estimate all you want - but there seems to be a meaningful amount of ignorance out there between reality and fairytale land.
A shortfall between plan assets and PBO is the expectation. I want my company's assets used to grow the business, not sitting in pension funds. The PBO calculation has nothing to do with plan assets, by the way.

A 40% shortfall to ABO would be a problem and recognized as a liability already.

Differences between expected and actual returns get amortized (albeit slowly) along with many other kinds of differences between actuarial estimates and actual results.
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Re: Serving on a Pension Board - Advice?

Post by Call_Me_Op »

Novine wrote:I was recently elected to the board overseeing our pension assets. As a new trustee, I'm still getting a handle on all of the responsibilities of the position. In the couple of meetings that I've attended so far, our financial advisor has talked about the "limitations of index funds" and the "opportunities available from 'alternative investments'". As you might expect, this raised some red flags for me. But being the new guy, I'm trying to listen and learn more before I start rocking the boat. Our pension fund is closed to new participants and we have a good number of retirees drawing pensions so I'm getting the impression from some board members that there's a sense of urgency to maximize returns. At this point, I'm most interested in advice from those who have served on a pension board or in a similar position and what things I can do to make sure that I'm doing my best to represent my fellow employees (along with my own pension!) and to preserve and grow the funds that we're responsible for overseeing.
Make sure this doesn't raise liability issues.
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Re: Serving on a Pension Board - Advice?

Post by leonard »

Personally - I would pay out of pocket to consult a lawyer to understand your exact, personal legal risk in doing your fiduciary duty on behalf of the pensioners for whom you are managing assets.

If I had a bunch of other people on the board that wanted to look at alternate asset classes, active management, etc - I personally would not consider myself to be executing fiduciary duty for the plan. If the board took action which I considered not to be in pensioners best interest - I would excuse myself from the board.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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Re: Serving on a Pension Board - Advice?

Post by Rick Ferri »

johnep wrote:I am a pensioner in the North Carolina state pension system. The pension AA is currently about 55% equity, 35% bond and 10% alternatives. In thier last FY. they did a nice job with equity and bonds, exceeding their benchmarks for both and their expenses were reasonable. However, they woefully underperformed in their alternatives which includes REITS and hedge funds. Also their investment costs were a lot higher in that space.
Couple of thoughts on this:

1) It's a given that some active managers will beat their benchmark and other won't. What really matters is Its the whole plan.If the entire plan is not beating a well constructed and appropriately weighted benchmark, then the entire plan should use low cost index fund in every asset class even though some managers have outperformed.

2) Exceeding benchmarks in the equity space is easy if the wrong benchmarks are selected. A fund manager needs only to hold more value stocks and small cap stocks than the market and they'll beat it over time. But this isn't skill. It's risk taken in a different way. Most plan do not account for this added risk in their investment policy.

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Re: Serving on a Pension Board - Advice?

Post by noyopacific »

Novine wrote:In the couple of meetings that I've attended so far, our financial advisor has talked about the "limitations of index funds" and the "opportunities available from 'alternative investments.'"
The nations largest pension fund, California Public Employees Retirement Service (CalPERS) has been moving toward more index investing for several years. In the hope of boosting performance, they have however continued using active management with a declining percentage of the fund. They have hired some of the best performing managers away from other funds, including alternative investment strategies. The results of their active managers have not lived up to expectations.
In the past month, CalPERS announced that they were considering discontinuing active management all-together and going strictly with index investing.
http://www.cbsnews.com/8301-505123_162- ... investing/
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Re: Serving on a Pension Board - Advice?

Post by Stonebr »

chaz wrote:Recognize that board members have a fiduciary duty to protect the pensioners and the assets.
Actually, their duty is to act SOLELY in the interests of the plan participants and beneficiaries. This is by Federal Law and is even stronger than you suggest.

The OP as an informed Boglehead must act to the best of his/her ability to promote the interests of the participants. I'd say the plan participants are lucky to have a Boglehead on the board.
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Re: Serving on a Pension Board - Advice?

Post by Stonebr »

leonard wrote:Personally - I would pay out of pocket to consult a lawyer to understand your exact, personal legal risk in doing your fiduciary duty on behalf of the pensioners for whom you are managing assets.

If I had a bunch of other people on the board that wanted to look at alternate asset classes, active management, etc - I personally would not consider myself to be executing fiduciary duty for the plan. If the board took action which I considered not to be in pensioners best interest - I would excuse myself from the board.
These debates go on all the time on pension boards. Quitting when you don't get your way the first you lose a vote won't do the participants any good.
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Re: Serving on a Pension Board - Advice?

Post by leonard »

Stonebr wrote:
leonard wrote:Personally - I would pay out of pocket to consult a lawyer to understand your exact, personal legal risk in doing your fiduciary duty on behalf of the pensioners for whom you are managing assets.

If I had a bunch of other people on the board that wanted to look at alternate asset classes, active management, etc - I personally would not consider myself to be executing fiduciary duty for the plan. If the board took action which I considered not to be in pensioners best interest - I would excuse myself from the board.
These debates go on all the time on pension boards. Quitting when you don't get your way the first you lose a vote won't do the participants any good.
Debates are great. My bottomline: if everybody decides to put money in a hedge fund for example - an investment that I believe is a clear breach of fiduciary duty - I personally would have no choice but to resign. I find it personally unethical and I think one is exposed to legal risk by breaching fiduciary duty.

Sure, it would be great to be the voice of reason - but once the group crosses the line - there would be only one choice for me.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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Novine
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Re: Serving on a Pension Board - Advice?

Post by Novine »

Thanks everyone for the feedback. I especially appreciate the links from livesoft about some of the duties and best practices for someone serving in a fiduciary role.

I had a chance to meet one-on-one with the investment advisor - probably a more accurate title than financial advisor as I first referenced - and ran through the numbers of the past few years and how the funds are invested. One of the justifications made for going with actively managed funds versus index funds is that the actively managed funds haven't experienced as great of losses when the market has gone down compared to the index. The numbers I saw verified that. But isn't this basically a matter of proper asset allocation? Couldn't we accomplish the same thing with a more conservative allocation of funds? A case can't be made that these actively managed funds provide more return on the upside because they've lagged the benchmarks the past year even as the market has been in positive territory.

On the alternative investment front, the board is moving forward with exploring some real estate investments despite having been burned a number of years ago with a bad real estate investment that the current investment advisor had to unwind. Fortunately, some of the scarier alternatives like hedge funds weren't explored. Also, the amount being considered for the alternatives is fairly limited. But again, the argument is being made that exposure to real estate provides us with more potential upside and a hedge against declines in the equities markets. Assuming that was true, couldn't we accomplish that by investing in REITs or similar funds that would have more transparency and liquidity? The proposals we're supposed to be presented will be for real estate investments with long-term commitments and dealing with a separate investment management group that sits between us and the actual real estate investments. Seems like more opacity and fees, not transparency and return for the pension fund.
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Re: Serving on a Pension Board - Advice?

Post by Rick Ferri »

Please read this:

More Unconventional Failure

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gasman
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Re: Serving on a Pension Board - Advice?

Post by gasman »

Recognize that some of the other board members may either be in the financial services industry, or have a spouse, neighbor, or close firend who is.

Ask if the board members have ANY relationship with the current or proposed custodian or advisor

You will be surprised how much the above matters.
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Re: Serving on a Pension Board - Advice?

Post by thewizzer »

I sit on a pension board.

Some of what has already been said is typical Boglehead type advice. Be scared of everything, don't any risks at all, everyone is going to try to sue you, etc...etc...

Here's my advice. Learn about your fund. Get a good grasp on your fund's investments. Ask about fees. Have your advisor provide a fee schedule of all the different investments that the fund is currently invested in. Talk to other members about your personal opinions regarding low cost index funds. Whenever your advisor recommends a new fund, ask about the fee structure and ask if there are any lower cost alternatives. He or she will get the point and will quickly learn that this question is coming, and therefore they should be smart enough to be able to prepare for it. Don't be rude, don't be pushy, don't be that guy who comes on the board and acts as though they know it all. If changes are necessary, sometimes it takes time to get there. Realize that other board members might have quite a bit of knowledge to impart; learn from them. Recognize that your advisor might be a genuinely good person, but don't let that get in the way if something needs to change. This is serious business, but don't keep yourself awake at night worrying about the boogeyman.

There's my two cents.

EDIT: Hope I didn't come off too harsh toward other posters. Lots of good advice and smart folks on this board. My point is, don't pass up the chance to sit on your pension board and make a real impact on it's direction just because you're worried about the what if's
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Re: Serving on a Pension Board - Advice?

Post by thewizzer »

So we had our quarterly meeting last Friday. I hate to toot my own horn (not really :D ), but our board switched a large portion of our SPDR ETF funds to Vanguard funds. Dropped expense ratios from 20 basis points to 7, which should save tens of thousands of dollars over the next few years. Oh happy days...
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Re: Serving on a Pension Board - Advice?

Post by JamesSFO »

thewizzer wrote:So we had our quarterly meeting last Friday. I hate to toot my own horn (not really :D ), but our board switched a large portion of our SPDR ETF funds to Vanguard funds. Dropped expense ratios from 20 basis points to 7, which should save tens of thousands of dollars over the next few years. Oh happy days...
Good work!
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Re: Serving on a Pension Board - Advice?

Post by WhyNotUs »

I serve on an modest endowment committee that has similar responsibilities but might be a zero or two smaller than a pension fund.
Someone mentioned being the voice of costs, that has worked well for me. We have significantly reduced costs over the last few years.

Another idea that we have implemented is creating a second baseline comparison portfolio based on our AA. In our case 40% Total Bond Mkt 40% Total Stock Market 20% Total Intl SM.
Each report compares our performance to the benchmarks for our current investments and five year look back and the total portfolio to the passive portfolio. We are beating the passive account at this time, largely because we had a 40% equity and 60% bond AA when the market tanked and had a bunch in cash and cds due to some market timing. The passive portfolio was fully invested on day one, which was just before the financial crisis. Since VTIAX does not go back 5 years we had to use a proxy. Integrating the passive portfolio into the quarterly reports will pay off over time.

Your comments about alternatives investments were discussed at our last meeting and we are pulling back on them. We ended up in them during the period of low interest rates and need to reposition ourselves for a better rate environment. I would say that this was one of the weakest recommendations from the investment advisors, came to REITs and Commodities too late for timing the market and the landscape was changing. It is a small position that will get smaller until reallocated.

The group has a variety of perspectives and nothing will change overnight. Overall, the committee has done a pretty good job representing the interests of our non-profit recipient.
We are also provided with information from our trust account and their investment committee. In addition, that investment committee participates in a investment committee that manages a few billion in investments and offers its perspectives.

It will probably be five years before I would expect to see significant reallocation to passive investments but I am patient and enjoy working with the other members, who have a different orientation. Our first move will be on the bond side over the next year. One thing in our favor is that the recipient needs a 5% distribution annually to meet its needed. I understand that pension funds may be targeting higher growth.
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