The Fiduciary Rule, TRS and Baby Boomer retirement savings.

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Gary Cohn.

Last week I wrote about an Obama administration’s expansion of the Fiduciary Rule.

Gary Cohn, the chief economic advisor to President Donald Trump and Director of the United States National Economic Council wants to role back the Obama changes to the rule. He was formerly the president and chief operating officer of Goldman Sachs.

What a shocker that is!

The changes to the rule would expand the categories of those who work in the financial investment field that are governed by it.

Simply put, the rule states that those who are investing your money must do so in your best interest and must notify you if there is a conflict of interest.

It seems like the least they could do.

Even most of those in the financial sector seem to think so.

But not Trump and Cohn.

Said Cohn, “This is like putting only healthy food on the menu, because unhealthy food tastes good but you still shouldn’t eat it because you might die younger.”

Jon Bauman, former executive Director of the Illinois Teacher Retirement System, wrote me following the earlier post to clarify the role of TRS and our TRS trustees.

Fred,
Just so there’s no ambiguity, the Trustees, staff, and investment managers of the TRS and their exclusive fiduciary duty to the membership of the Retirement System are completely unaffected by the rollback of this rule. Their fiduciary duties arise out of State law and secondarily, the IRS code. The State Board of Investment, its staff and investment managers have a similar role for State Employees, and so on.
With 403(b) providers, at this moment, there is a great deal of uncertainty as to their fiduciary status.
This is instructive for those at, as you like to call it and I like to laugh when you do so, the “right wing stink tank” that wants to shove us all into 401(k)s to “save money.” Rich Miller had a post up yesterday on this latter topic with a couple good analyses from outside pension experts (who I know to be credible) that shot this idea chock full of holes.

Jon’s clarification about TRS and their investment managers’  fiduciary responsibilities to TRS members is good news.

But for those who, because they are public employees, have much of their savings in 403(b) accounts, a rollback of the Obama protections is worrisome to say the least.

403(b) are accounts are where most public employees have their retirement savings and they already suck compared to the earnings of a 401(k). And Jon is right that the attempts to move our defined benefit system into a 401(k) defined contribution system would be a financial risk and disaster for Baby Boomers and other retirees.

I already hear that where ACA rules had capped insurance rates for old people at no more than three times what the insurance companies charge millennials, TrumpCare will permit insurers to charge old people 3.49 times their lowest rates.

9 thoughts on “The Fiduciary Rule, TRS and Baby Boomer retirement savings.

  1. Cohn is Trump and Kellyanne league liar. He said that the Volker rule was stopping small business lending. Simply put the Volker Rule out limits on their Gambling.He made this claim in response to a question on Bloomberg TV . The question was along the lines of how in the world is the Volker Rule tied to small business lending.He claimed that they could lend our gambling wins….he seems to have forgotten all the gambling losses that bankrupted them.

  2. Fred,

    I have three comments: 1) I am not surprised about the Fiduciary Rule change. It is killing two birds with one stone. That is, it provides the potential for greater big-business profits, while at the same time minimizing any possibility that the little guy could sue for breach of fiduciary duty. Minimizing Worker’s Compensation has similar goals. Screw the little guy. 2) I find it amusing that Jon Bauman, former TRS Executive Director, would be the TRS Fiduciary expert, or even bringing up the issue, when he was responsible for the side-steeping of the TRS finder’s fee prohibition policy, while serving in that position. As you recall his payment was the ability to complete his own annual job perform review. Thus, in my mind, under his direction, the TRS board violated their fiduciary responsibility. They knew that they were allowing the finder’s fee to be paid, but because of lack of transparency, we never knew any better. In my mind, as long as there is no transparency at TRS, there is no way of knowing how often they trample on their fiduciary responsibility. 3) I will be going later today to the TRS Town Hall Meeting in Wheaton. The last Ingram led Town Hall Meeting that I attended was several years ago, when in my mind he was violating his Fiduciary responsibility when he was promoting, or minimally blaming COLA, for the TRS funding dilemma, when he should have been focusing on the funding issues. Our TRS benefit statement represents a TRS fiduciary responsibility. Anything contrary to the benefit statement is not only a violation of the State Constitution, as upheld by the courts, but is a violation of TRS’ Fiduciary responsibility. It appears from today’s Town Hall Presentation Notes, that due to the State Supreme Court ruling, that Ingram realizes that fact, but I will still be interested in what he has to say and how he says it.

    Tom White, IRTA & IFT member and retired Executive Director, MWRD Retirement Fund (40 ILCS 5/13)

    • Thanks Tom. Just one quick comment about transparency. TRS executive director Richard Ingram makes it virtually impossible for a TRS member living in Chicago to attend TRS information meetings. The so-called “Chicago-area meetings” are in distant suburbs and scheduled around rush hour. This, in spite of yearly requests to schedule at least one in the City.

      • Fred,

        10 years ago, I was an observer for the IRTA when TRS had two meeting a year in Chicago. I brought up the issue of transparency then and was ignored. I don’t know if things have changed, but my comments below were relevant then, and I am guessing are pretty much relevant today.

        The real problem is that the TRS consultant engagement process is conducted under a vale of secrecy. As a result of their internal screening process, they almost always only allow the finalists to present at the public meeting. With no other presentation, or comparative information, how can the public discern their objectivity. The TRS trustees in their meeting packets, have the details of the potential engagement, and I am assuming some rationale as to why this particular consultant is the finalist. However, when we asked if the TRS Trustee Due Diligence Report could be made public, we were told that due to proprietary information, the contents may not be disclosed. I asked myself, what are they hiding? Maybe that they are allowing a finders fee to be paid? Or maybe the fee structure is not competitive? Or maybe their process is not as objective as we might expect? Don’t get me wrong, in general they have produced competitive investment returns, but being more transparent could only ensure less chance of outside influence, without undermining performance.

        Minimally they should publish their formal investment policy along with the practices and procedures, so that the public is aware of the “rules” under which they operate. Thus, the assumption is that every hire is based upon a need to fill a pre-defined spot within their asset allocation policy. Their formal investment policies and procedures might include their “most favored client policy”, to ensure a competitive fee structure, “finders fee prohibition policy”, to minimize political influence. Furthermore, is there a minimum number of years for which the prospective firm has competitive historical returns for the specific product, under the same management team? Is a prospective manager’s assets under management in the product a qualifying requirement? For example, would they invest $1 Million in a product in which they or a major stakeholder represented 50% or more of the assets? There are a multitude of administrative polices and procedure that should be in place with regard to ensuring objectivity and prudence in the selection of consultants. Without that type of information, there is no transparency, regardless of where they conduct their meetings!

  3. I heard Stuart Levine was getting paid by one of Rauner’s companies as a consultant while on the TRS board that made decisions on who TRS would select to invest TRS money. Big amounts of money. That information turned up during an investigation unrelated to TRS. How many other problems could there be at TRS that have never been detected?

  4. Tom, with respect, you have your facts confused. Upon my recommendation and before any improper finders’ fees were discovered, the TRS Board enacted an absolute ban on finders’ fees in August of 2005. We were one of the first pension funds in the country to do so. Of the fees paid prior to that date, only one was found to be improper due to funds being diverted to parties unknown to TRS. Those funds were paid by an investment manager, not TRS. Not ONE DOLLAR of the teachers’ money was ever at risk during the time of this activity. The “wrote his own evaluation” involved one year and the document in question was circulated to the entire Board of Trustees. Finally, I have disagreed here on Fred’s pages and in other forums the approach Director Ingram initially took toward discussing the cost of the AAI (“COLA”) That approach was vetted and approved by the Board of Trustees. Like it or not, Director Ingram is correct about the cost of this benefit exceeding the contributions paid.
    I agree with Fred, because I did the same thing until I was called out and corrected it, that TRS needs to fine-tune its meeting schedule to get into the City or a close in suburb. Former Trustee Sharon Leggett was a strong advocate of doing so during her tenure.

    • Jon,

      I don’t believe that I have my facts confused.

      Prior to 2005, probably somewhere between 1998 and 2000. I reached out to the TRS investment management team, Kim Pollit (spelling?) regarding the Finders Fee issue as well as the most favored client policy. This would have been prior to your being the TRS Executive Director. I am certain that TRS had adopted a Finders Fee prohibition way prior to the “Stuart Levine” debacle, although I am unsure as to the exact scope of the policy, or if it was still in effect when you got there. It is possible that it had exclusions such as venture capital, real estate etc. although that also would have been political maneuvering. As we all know, finders fees are paid by the firm that received the assignment (business). The point being, although it cost TRS nothing directly, it taints the hiring of the consultant, basically calling into question the objectivity and compliance of the Trustees and the Fund with its fiduciary responsibility. Additionally, partly because of a lack of transparency, TRS was able to side-step their own (former) policy.

      Regarding Director Ingram, I don’t doubt that the liability associated with COLA exceeded the contribution. My point was that initially the TRS Board adopted a policy regarding Pension Reform Legislation, which did not require Director Ingram to ensure that TRS’ approval included upholding the non-diminishment clause. Later, the TRS Trustees added that requirement. Based upon what I heard yesterday in Wheaton, it appears that he realizes that TRS has a fiduciary responsibility to uphold the Illinois Supreme Court decision. Prior to that his attitude was that our COLA could be reduced in order to ensure TRS’ long term viability. Thus, the end justifies the means.

      Once again, having TRS Board meetings in Chicago, without transparency, is basically a waste of effort and expense.

  5. I’m going to end my end of the back-and-forth here.

    Tom, you are not being fair to Fred’s readership when you use your memory as your research library.

    Further review of minutes and discussions with TRS’ former General Counsel and a former CIO confirmed that there was no finders’ fee ban nor “most favored client” policy in place at place at TRS until the finders’ fee ban was enacted in 2005; none of us recall or find a document ever called “most favored client.” I suspect the TRS Investment Policy may have said, and may still say, that in bargaining fees with prospective investment managers (“consultants” in your vernacular) staff is directed to seek “most favored Nation” status. That term of art means that TRS is entitled to the lowest fee structure in the manager’s product line as similarly sized clients. For example, Firm ABC may have a bid structure of 25 to 50 basis points (for readers, a basis point is .01%) and quotes TRS 30 points for a $500 million assignment. if the manager has other $500 million clients paying 25, they either offer TRS 25 or no deal, as it should be.

    As far as “transparency” in the investment process, so much has changed since my departure that I don’t feel commenting on the current processes. I can point you to a 2009 law that required the factors which entered into each money manager selection to be publicly disclosed. TRS has them on their website. Interesting reading.

    Jon

    • Jon,

      The most favored client policy, is important, but certainly the “finders Fee” prohibition policy in light of Stuart Levine, is the more significant issue. I stand by my statement that around 2000, the MWRD retirement fund adopted a Finder’s Fee prohibition policy modeled after what was, I believe, provided by the TRS investment staff. My assumption at that time was that TRS had adopted such a policy, however I was not provided with a TRS adoption date, and I realize that this was prior to your becoming the TRS Executive Director.

      I must admit that being a small fund, I attempted to use the large funds dedicated investment staff so as to avoid re-inventing the wheel. Thus, TRS was not the only fund whose expertise we attempted to leverage, but I have always attributed our policy to TRS. However, based upon your historical search, it is possible that I could be mistaken.

      Regarding TRS transparency under the 2009 law, you may be correct. I will make it a point to visit the TRS website, with the hope that the law actually has resulted in transparency in the hiring of TRS consultants. This would not only include the details of the engagement, but also the underlying objective evaluation criteria utilized in the selection process.

      Tom

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