Edward Siedle: Your State Pension Is Not Fully Protected Under Law

https://www.forbes.com/sites/edwardsiedle/2021/09/08/your-state-pension-is-not-fully-protected-under-law/?sh=47227a0e4bbd

Forbes

September 8, 2021

Your State Pension Is Not Fully Protected Under Law

Edward Siedle

Contributor

Retirement Pension forensics expert and record-setting whistleblower award winner

State and local government pensions assure workers and retirees that they enjoy the same protections as the comprehensive federal law, ERISA provides to corporate participants. That’s simply not true. Don’t count on state law to protect your retirement security.

Photo: State and local government pensions do not offer the same level of protection as ERISA-regulated corporate pensions. GETTY

It has been said that the Law is a blunt instrument, incapable of dealing with all shades and circumstances, with little or no regard for individual situations. Management of pensions is doubly complex because equal parts of law and investing are involved. Typically, those knowledgeable regarding pension law, lack investment expertise and vice versa. Lawyers, judges and regulators rarely understand investment theories, strategies and practices well enough to sort through the nonsense and make sound decisions. They are regularly misled by savvy Wall Streeters intent upon selling dicey financial products. Even well-intentioned investment experts rarely grasp nuances which can have severe legal consequences.

Sadly, pension overseers are often the most clueless of all regarding both pension law and investing.

Further, the world of investing is fluid—ever changing. New investment products and practices emerge and old schemes come back into vogue every few years. The law moves slowly—the law does not, and possibly cannot, supply clear, timely answers for every pension management question that arises. 

Derivatives? Bitcoin?

Even where the most comprehensive legal and regulatory framework exists and answers are crystal-clear, your pension is at risk because enforcement or policing of the law is lacking. I have taught U.S. Department of Labor pension investigators. As trained and committed as they are, they’re hopelessly out-gunned by the investment industry. Wall Street runs circles around regulators charged with enforcing pension laws.

However, the vast majority of pensions are not subject to any comprehensive law.

For example, as hard as it is to believe, explain or justify, the approximately $4 trillion in America’s government pensions is not protected by any comprehensive federal or state law.

The Employee Retirement Income Security Act of 1974 (ERISA), the federal law that establishes minimum standards for pension plans in private industry, does not apply to public pensions.

ERISA was enacted to protect the interests of employee benefit plan participants and their beneficiaries by requiring the disclosure of financial and other information concerning the plan to beneficiaries; establishing standards of conduct for plan fiduciaries; and providing for appropriate remedies and access to the federal courts.

Since ERISA doesn’t apply, none of the above mentioned protections exist with respect to America’s state and local government pensions.

Further, both investment managers hired to manage public pension assets and public pensions themselves often get confused as to what legal standards apply.For example, my 2015 forensic investigation of the Jacksonville Police and Fire Pension Fund revealed that while the city pension was not subject to federal (ERISA) pension law, since it had voluntarily adopted the highest ERISA legal standards and then failed to enforce those standards, violators could be subject to personal liability for any ERISA fiduciary breaches. In short, this non-ERISA government pension voluntarily became ERISA governed, much to the confusion of all involved.

So, if ERISA does not cover state and local pensions in America, what law does?There is no comprehensive law. Public pensions are regulated by a thin patchwork quilt of state and local laws. Many of the most significant issues related to managing state and local pensions are unanswered in these statutes. Anything that’s not clearly illegal under applicable law can probably be gotten away with.For example, another investigation of a government pension I undertook revealed that while local law prohibited the pension from investing in hedge funds, the pension had secured a twisted legal opinion from a local firm that an investment in a trust that, in turn, invested exclusively in hedge funds was permissible.An investment in a fund that invested exclusively in hedge funds was not an investment in a hedge fund—got that?

The pension overseers were obviously hell-bent upon gambling in hedge funds. Some Wall Street huckster had sold them on a complex hedge fund investment they neither understood nor would have selected on their own. The overseers weren’t about to let the law get in their way. They didn’t outright break the law—they just bent it in their direction.

Read the rest of the article here. 

Edward Siedle, Pension forensics expert and record-setting whistleblower award winner, is a former SEC attorney, investment banking and securities industry professional, and longtime Forbes writer. He is the nation's leading expert in forensic investigations of money managers and pensions, focusing upon excessive and hidden investment fees and risks, conflicts of interest and wrongdoing. He was named as one of the 40 most influential people in the U.S. pension debate by Institutional Investor Magazine for 2014 and 2015. His preliminary report on his forensic investigation of STRS, The High Cost of Secrecy, was released June 7, 2021.