The Denver Post
By Anne Colden Denver Post Business Writer
March 25, 2001
The kind of investing that wreaked havoc with union pension funds of electrical workers in Aurora and throughout the West not too long ago is rare, investment advisers say. But there are certain signs savvy employees should watch for to make sure their pension fund is well run.
Problems, including fraud, can be prevented by setting up a plan properly, said David Halseth, principal at HCM Group, pension and investment counselors in Louisville.
"A bank or brokerage should be hired to act as a custodian holding the assets, who gives it to a qualified plan manager who is registered with the Securities and Exchange Commission," he said "If those steps are taken, the probability for outright fraud is very, very small."
Members of the Oregon Laborers Union noticed a discrepancy in their fund's annual report, which triggered the investigation into Portland-based investment advisers Capital Consultants. Capital Consultants is accused of imprudently investing more than $150 million in pension plan funds. The plans lost more than $100 million as a result.
The Eighth District Electrical Trust Fund of Aurora, which handles pension investments for about 8,000 union electricians in Colorado and four other Rocky Mountain states, had investments valued at $45 million with Capital Consultants. Suits by the Securities and Exchange Commission and the U.S Department of Labor against the money management firm are pending.
"You never write a check to someone who says they are going to invest it," Halseth said. Checks should go to the custodial bank or broker. The investment adviser should only have the authority to make a recommendation to buy or sell, he said.
A company sponsoring a defined contribution plan, such as a 401(k), should put in place a process ---- a demographic analysis of its employees to determine the kinds of investment options it should offer, for example, said Halseth.
Asset managers and plan sponsors of both 401(k)s and more traditional pension plans, called defined benefit plans, are bound to follow rules set forth in the Employee Retirement Income Security Act. Both types of plans should include an investment policy statement.
Defined benefit plans pay a lump sum, or a guaranteed monthly amount upon retirement. Payout is based on a set formula such as the number of years worked, multiplied by a percentage of highest earnings on the job.
Defined contribution plans such as 401(k)s don't guarantee a set payout. Instead, the return depends on how long you participated in the plan, how much is invested and how well the investments do over the years. Defined benefit plans fell out of favor in the past few years as legislation made them more expensive for companies to maintain.
"401(k)s became portable and cheap ways to provide a retirement plan," Halseth said.
Now that the market has shifted, however, experts like Halseth think defined benefit plans will come back into favor.
"Employees are chasing performance," Halseth said. "When the market is good, everyone is happy."
The strong market created the illusion that anyone could be a winner.
"How many people cut their own hair or fix their own engines? But everyone thinks they can be their own money manager," Halseth said.
Halseth said employers who take their responsibilities lightly are asking for trouble.
With the kind of stock market returns investors have seen in the past few years, employees watched gleefully as their 401(k)s turned into handsome nest eggs. But now, as the stock market is faltering, lawsuits accusing employers of not exercising proper fiduciary duty over 401(k)s are bound to proliferate, especially if returns are slashed for several years running, Halseth said.
Traditional pension plans where employers make contributions for their employees can be a source of temptation, said Frank Isenhart, retired chief executive of Denver investment counseling firm Tempest, lsenhart, Chafee & Lansdowne.
Employers can push their fund manager to make more risky, high-yield investments, As yield increases, the employer can cut back on the company's investment in the fund and place the savings into earnings, Isenhart said.
An employer who pressures a manager to take that kind of risk may find himself the target of a lawsuit if the plan takes big losses, Isenhart said.
There isn't much employees can do to protect themselves from that kind of risk, though. They don't have a say in how the boss invests the money because it doesn't become theirs until they retire, Halseth said.
And there is no way for them to keep an eye on those investments as they're made. "Since it's the company's money, the employees don't have much to say."
One way for employees to protect their traditional pension plans is, to learn as much about investing as they can. If they don't like the way the fund is performing they can then register a complaint with their employer, he said.
Unlike 401(k)s, pension plans are insured by the federal government through the Pension Benefit Guaranty Corp. The PBGC was set up to assure that if pensions go bankrupt it can provide some of the benefits employees would otherwise lose.
How much of the pension those employees eventually get depends on the amount the agency can recover from the company.
Halseth thinks if investors see more returns like they did in 2000, they'll revisit defined benefit plans. Newer versions of the plans, such as cash-balance plans which are a hybrid of traditional plans and defined contribution plans like 401(k)s, provide more portability than traditional pension funds. "They are a good benefit. You have consulting firms investing prudently. They are diversified, and handled well," he said.
Denver Post Business Writer Tom McGhee contributed to this Report.
Here are tips to make sure that you get your money's worth from a 401 (k) or other defined contribution plan:
Educate yourself about the plan's investment options. "Check under the hood. Make sure the fund is doing what it says it's doing," said David Halseth, principal at HCM Group, pension and investment counselors in Louisville. If you want your money in stocks, make sure the plan provider is putting your money into a fund that consists primarily of stocks. Research firms like Morningstar at www.morningstar.com can provide this information.
Consider the amount of time before you retire and how much risk you can reasonably take as you create a portfolio.
Make sure your employer is depositing payroll deductions within two weeks or so. In most cases, the employee can check by calling the fund or other plan provider at an automated telephone service, or logging onto a Web page.
Request a listing of fees you are paying the provider to administer your account and other services from your human resources department.