Sodexo’s Twisted 401(k)

French catering services group Sodexo employee...

French catering services group Sodexo employees block the entrance of the local community central canteen of the French southern city of Marseille, on June 7, 2011 as part of an international one-day protest for wage rise.

Any company that wishes, for whatever twisted reason, to create a 401(k) for its employees that is both monstrously incomprehensible and costly, should study Sodexo’s retirement savings plan. I’ve looked at thousands of 401(k)s in my professional career, but this one just doesn’t add up.

Sodexo is one of the largest food services and facilities management companies in the world, with 380,000 employees worldwide. After merging with Marriott Management Services in 1998, it became one of the largest food services providers in America. The company has a history of tumultuous labor relations, alleged low pay and sub-par job standards.

The Sodexo 401(k) plan has a poor participation rate—only about 108,000 active participants—and with almost $1 billion million in assets, it’s a mega-plan with plenty of bargaining clout. Given average account balances of $12,000, when these food services workers retire, they won’t be eating filet mignon.

Sodexo may claim to be a world leader in quality of life services that “believes the quality of daily life increases the satisfaction and motivation of individuals,” but, in my opinion, its needlessly complex defined contribution plan most assuredly is neither satisfying nor motivating to employees. It can’t be.

Why? Simply put, I doubt there is a single Sodexo employee who fully understands the inner workings of this beast. Worse still, the flawed design of the 401(k) virtually ensures, in my opinion, that errors in calculating account balances will arise.

Until 2011, Sodexo’s 401(k) used two different methods to track and value employee investments. For amounts invested in any of the plan’s stable value, indexed or balanced investment options, the investments were tracked using investment “units” which had unit values that were unique to the plan. That meant participants had to rely upon the plan for information regarding these investments—they couldn’t look to Morningstar or any other independent third party to verify the unique values.

On the other hand, the plan’s mutual fund options were tracked using share values that were common to all investors in each mutual fund—values that were not unique to the plan.

401(k) investment options with unit values tend to confuse participants because the funds often have names and strategies similar to publicly-traded mutual funds but are opaque, with expenses and performance results that differ from the publicly-traded funds. That was confusing enough.

Starting in January 2011, Sodexo began tracking all the investment options in the plan using the unit value method. Participants were told, “Using unit values that are unique to our Plan allows us to negotiate the most competitive arrangements possible with the Plan’s recordkeeper (ING) and other operational vendors, while spreading the costs evenly across all Plan investments.”

I’m not-so-sure that unitizing all the investment options offered within the plan will, as Sodexo says, result in the most competitive arrangements possible for participants. The recent Form 5500s filed with the Department of Labor do not evidence any savings; indeed, costs appear to have increased. I’ve called Sodexo for information about the savings related to unitizing all the 401(k) options. In the event I am provided with the savings amounts by Sodexo, I will provide them to readers.

In my opinion, using institutional mutual funds in a retirement plan of this size would have resulted in lower costs far more easily and with no loss of transparency. Further, since Sodexo’s unitized funds invest in mutual funds, as opposed to separately managed accounts, it is impossible that the cost of investing in the unitized trusts (which, in turn, invest in mutual funds) could actually be lower than the fixed-cost of the underlying mutual funds. That’s obvious—right?

The fee and expense information provided to participants that I have reviewed is confusing because the total annual operating expenses of each investment option, according to the company, “may include certain plan related expenses.” In other words, the disclosure does not indicate exactly how much participants are paying for money management versus administration. Money management and plan related expenses are lumped together. The plan’s not cheap.

For example, with a fee of 1.16%, the MFS Large Cap Growth Fund offered in the plan is no bargain. Worse still, why should participants pay an annual operating expense of 42 basis points to buy units in the Marriott International Stock Fund? They could simply buy Marriott stock (which is all this fund invests in), incurring only a brokerage commission, as opposed to a recurring asset-based fee on top of any commission.

How confusing can the Sodexo401(k) plan get?

I was recently contacted by a Sodexo senior management retiree who was perplexed as to seemingly inexplicable fluctuations in the value of her retirement savings account. Last December she had had a sizable capital gains distribution, approximately $30,000, credited to her account which was reversed out the next week without explanation. “The money just disappeared, “she says.

When questioned about the disappearing distribution in December 2012, ING, which did not have any immediate answer, indicated that it would research the matter and assigned a case number. Later that month a representative indicated that the capital gains distribution credited to her account was a computer error. When questioned about what happened to the capital gains distribution amount taken from her account, the ING representative had no answer. This is not surprising to me because it’s unlikely telephone call center staffers would be trained in the complexities related to unitizing mutual funds in 401(k)s. What they can’t explain, Sodexo’s workers can’t possibly understand.

The retiree’s CPA was also mystified. “My biggest question is,” she said to him, “is there possible wrongdoing/mismanagement on ING’s part that is either limited to my account or greater than my own issue? If there could be, who do I engage to see if this is or could be true? You, a financial lawyer, an investment house or ??”

In January, the retiree contacted the mutual fund company involved for information about any capital gains paid in December and was told there had been a distribution, furthering confusing the investor. In March, after contacting Sodexo, the company provided an email explanation that I found to be truly mind-numbing upon first reading:

Source Article from http://www.forbes.com/sites/edwardsiedle/2013/05/22/sodexos-twisted-401k/
Sodexo’s Twisted 401(k)
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Teamsters Multiemployer Pensions On The Brink: DOL Asked To Investigate

NEW YORK, NY - OCTOBER 18: Members of the Occu...

NEW YORK, NY – OCTOBER 18: Members of the Occupy Wall Street community join Teamsters in front of the auction house Sotheby’s to protest the lockout of union art handlers in a contract dispute on October 18, 2011 in New York City.

Across the nation largely less-skilled older workers participating in multiemployer pension funds are at risk of losing the limited retirement security they had and slipping into poverty. Reductions or limitations on benefits–such as disability benefits–may spell doom for some workers, particularly those with physically demanding jobs. Too frail to work, too poor to retire will be their fate.

As the name suggests, a multiemployer plan is funded by more than one employer, typically in the same industry, such as retail, construction, mining and transportation. Each employer makes contributions to the plan on behalf of their employees, usually under the terms of a collective bargaining agreement.

The Pension Benefit Guaranty Corporation, the government agency that protects pensions, insures more than 10 million Americans in multiemployer pension plans. Millions of participants in multiemployer plans have already received cryptic notices that their plans are underfunded and will likely be taken over by the PBGC within three to five years.

Just how much benefits will be slashed in the event of a PBGC takeover is not disclosed. Workers have to contact the PBGC to learn what impact the cuts will have on their retirement benefits—assuming PBGC “protection” even exists in the future. That’s a big assumption given what a recent report by the Government Accountability Office has to say about these plan insolvencies that threaten the PBGC’s multiemployer insurance fund.

The GAO report ominously entitled, “Multiemployer Plans and PBGC Face Urgent Challenges,” dated March 5, 2013 warns:  

“The Pension Benefit Guaranty Corporation’s (PBGC) financial assistance to multiemployer plans continues to increase, and plan insolvencies threaten PBGC’s multiemployer insurance fund. As a result of current and anticipated financial assistance, the present value of PBGC’s liability for plans that are insolvent or expected to become insolvent within 10 years increased from $1.8 to $7.0 billion between fiscal years 2008 and 2012. Yet PBGC’s multiemployer insurance fund only had $1.8 billion in total assets in 2012. PBGC officials said that financial assistance to these plans would likely exhaust the fund in or about 2023. If the fund is exhausted, many retirees will see their pension benefits reduced to a small fraction of their original value because only a reduced stream of insurance premium payments will be available to pay benefits.”

Teamsters multiemployer pensions are particularly a risk. That means older blue-collar truck and bus drivers, warehouse and construction workers and others who are unemployable because they lack skills that employers seek today or who may, due to poor health or disability, be precluded from continuing to work, are out of luck. The elderly workers who have already retired may get hurt worst. With limited pensions and only Social Security to rely upon, these geriatrics will almost assuredly slip into poverty.

Some Teamsters want answers but aren’t getting them. What caused their pensions to plummet in the past decade? Was the demise of their pension entirely unforeseeable, due to unknowable market forces or was foul-play involved?

Louis J. Alimena, former President of the Local 707 Teamsters, a trucking and warehouse workers union, and former trustee of the Local 707 Pension Health Welfare Funds IBT says, “Many of these Teamsters multiemployer pensions could have locked in an 8% return for fifteen years on assets when the pensions were already overfunded in 2000. Instead they chose to take unnecessary risks hiring equity investment managers. That worked just fine for Wall Street but killed our pensions. I’ve asked the Department of Labor to investigate but the DOL is doing nothing.”

On June 14, 2012, Alimena sent a letter to Jonathan Kay, Director of the New York Regional Office of the Department of Labor, asking for an investigation into the causes of the apparent impending demise of the Local 707 pension. Of greatest concern to him is the longstanding relationship between the pension and its investment consultant. According to Alimena, the consultant is a securities broker who may have been receiving commissions from the money managers he recommended to the fund. Alimena has repeatedly asked for a copy of the contract between the pension and the investment consultant to no avail, he says.

He ends his letter to Kay with the following plea: “We depend upon the Department of Labor to have oversight responsibilities and to at least inspect the failure of these trustees and advisors to secure these funds. To the best of my knowledge, there has been no DOL audit of these funds since 1997. In light of the lack of response from all parties to the fund, and my concern for the integrity of the fund’s management, I am requesting a fiduciary breach investigation by your department. All retirees including myself look forward to your help in this matter.”

Alimena’s concerns may be justified. I have conducted fiduciary breach investigations on behalf of pensions that retain conflicted “gatekeepers” to make recommendations regarding asset allocation and money management hires. My investigations have proven that conflicts of interest involving these advisers cause substantial, quantifiable harm. There are no harmless kickbacks.

Pervasive investment industry scamming may not be the sole reason our nation’s pensions are failing but, in my opinion, it is a significant contributing factor—and one which regulators and law enforcement inexplicably choose to ignore.   

 

Source Article from http://www.forbes.com/sites/edwardsiedle/2013/05/13/teamsters-multiemployer-pensions-on-brink-of-collapse-dol-asked-to-investigate/
Teamsters Multiemployer Pensions On The Brink: DOL Asked To Investigate
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Teamsters Multiemployer Pensions On Brink Of Collapse: DOL Asked To Investigate

NEW YORK, NY - OCTOBER 18: Members of the Occu...

NEW YORK, NY – OCTOBER 18: Members of the Occupy Wall Street community join Teamsters in front of the auction house Sotheby’s to protest the lockout of union art handlers in a contract dispute on October 18, 2011 in New York City.

Across the nation largely less-skilled older workers participating in multiemployer pension funds are at risk of losing the limited retirement security they had and slipping into poverty. Reductions or limitations on benefits–such as disability benefits–may spell doom for some older workers, particularly those with physically demanding jobs. Too frail to work, too poor to retire will be their fate.

As the name suggests, a multiemployer plan is funded by more than one employer, typically in the same industry, such as retail, construction, mining and transportation. Each employer makes contributions to the plan on behalf of their employees, usually under the terms of a collective bargaining agreement.

The Pension Benefit Guaranty Corporation, the government agency that protects pensions, insures more than 10 million Americans in multiemployer pension plans. Millions of participants in multiemployer plans have already received cryptic notices that their plans are underfunded and will likely be taken over by the PBGC within three to five years.

Just how much their benefits will be slashed in the event of a PBGC takeover is not disclosed. Workers have to contact the PBGC to learn what impact the cuts will have on their retirement benefits—assuming PBGC “protection” even exists in the future. That’s a big assumption given what a recent report by the Government Accountability Office has to say about these plan insolvencies that threaten the PBGC’s multiemployer insurance fund.

The GAO report ominously entitled, “Multiemployer Plans and PBGC Face Urgent Challenges,” dated March 5, 2013 warns:  

“The Pension Benefit Guaranty Corporation’s (PBGC) financial assistance to multiemployer plans continues to increase, and plan insolvencies threaten PBGC’s multiemployer insurance fund. As a result of current and anticipated financial assistance, the present value of PBGC’s liability for plans that are insolvent or expected to become insolvent within 10 years increased from $1.8 to $7.0 billion between fiscal years 2008 and 2012. Yet PBGC’s multiemployer insurance fund only had $1.8 billion in total assets in 2012. PBGC officials said that financial assistance to these plans would likely exhaust the fund in or about 2023. If the fund is exhausted, many retirees will see their pension benefits reduced to a small fraction of their original value because only a reduced stream of insurance premium payments will be available to pay benefits.”

Teamsters multiemployer pensions are particularly a risk. That means older blue-collar truck and bus drivers, warehouse and construction workers and others who are unemployable because they lack skills that employers seek today or who may, due to poor health or disability, be precluded from continuing to work, are out of luck. The elderly workers who have already retired may get hurt worst. With limited pensions and only Social Security to rely upon, these geriatrics will almost assuredly slip into poverty.

Some Teamsters want answers but aren’t getting them. What caused their pensions to plummet in the past decade? Was the demise of their pension entirely unforeseeable, due to unknowable market forces or was foul-play involved?

Louis J. Alimena, former President of the Local 707 Teamsters, a trucking and warehouse workers union, and former trustee of the Local 707 Pension Health Welfare Funds IBT says, “Many of these Teamsters multiemployer pensions could have locked in an 8% return for fifteen years on assets when the pensions were already overfunded in 2000. Instead they chose to take unnecessary risks hiring equity investment managers. That worked just fine for Wall Street but killed our pensions. I’ve asked the Department of Labor to investigate but the DOL is doing nothing.”

On June 14, 2012, Alimena sent a letter to Jonathan Kay, Director of the New York Regional Office of the Department of Labor, asking for an investigation into the causes of the apparent impending demise of the Local 707 pension. Of greatest concern to him is the longstanding relationship between the pension and its investment consultant. According to Alimena, the consultant is a securities broker who may have been receiving commissions from the money managers he recommended to the fund. Alimena has repeatedly asked for a copy of the contract between the pension and the investment consultant to no avail, he says.

He ends his letter to Kay with the following plea: “We depend upon the Department of Labor to have oversight responsibilities and to at least inspect the failure of these trustees and advisors to secure these funds. Top the best of my knowledge, there has been no DOL audit of these funds since 1997. In light of the lack of response from all parties to the fund, and my concern for the integrity of the fund’s management, I am requesting a fiduciary breach investigation by your department. All retirees including myself look forward to your help in this matter.”

I have conducted fiduciary breach investigations on behalf of pensions that retain conflicted “gatekeepers” to make recommendations regarding asset allocation and money management hires. My investigations have proven that conflicts of interest involving these advisers result in substantial, quantifiable harm. There are no harmless kickbacks.

Pervasive investment industry scamming may not be the sole reason our nation’s pensions are failing but, in my opinion, it is a significant contributing factor—and one which regulators and law enforcement inexplicably choose to ignore.   

 

Source Article from http://www.forbes.com/sites/edwardsiedle/2013/05/13/teamsters-multiemployer-pensions-on-brink-of-collapse-dol-asked-to-investigate/
Teamsters Multiemployer Pensions On Brink Of Collapse: DOL Asked To Investigate
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Investor Bulletin: Pension or Settlement Income Streams

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Source Article from http://www.sec.gov/investor/alerts/ib_income_streams.pdf
Investor Bulletin: Pension or Settlement Income Streams
http://www.sec.gov/investor/alerts/ib_income_streams.pdf
http://www.sec.gov/rss/investor/alertsandbulletins.xml
SEC.gov Updates: Investor Alerts and Bulletins
The SEC’s Office of Investor Education and Advocacy provides a variety of services and tools to address problems you may face as an investor. These Investor Alerts and Investor Bulletins, focused on topical issues including recent Commission actions, are provided as a service to investors.

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Slow Blow: Blowing The Whistle At SEC On Ponzi Scheme Takes Time

English: Mug shot of Charles Ponzi (March 3, 1...

English: Mug shot of Charles Ponzi (March 3, 1882 – January 18, 1949). Charles Ponzi was born in Italy and became known as a swindler for his money scheme. His aliases include Charles Ponei, Charles P. Bianchi, Carl and Carlo. Italiano: Foto segnaletica di Charles Ponzi. Charles Ponzi (Lugo, 3 marzo 1882 – Rio de Janeiro, 18 gennaio 1949) è stato un truffatore italiano. Immigrò negli Stati Uniti, dove divenne uno dei più grandi truffatori della storia americana. (Photo credit: Wikipedia)

Last week over margaritas and nachos with a couple who are friends of mine, I learned that they apparently have lost the entire down payment on a house they were poised to buy, as a result of investing in a supposed corporate bridge loan scheme that promised astronomical returns of 30% or more. The investment had been recommended to them by business associates who invested far greater amounts. It looks like the scheme involves millions.

This is not the first time my friends were victimized by fraudsters. Last year they were ripped-of by the Zeek Rewards Ponzi scheme, an equally dubious enterprise that bilked investors out of an impressive $600 million.  These investment setbacks have made it all the more difficult for the couple to rebuild their credit after the 2008 real estate bubble burst and their home was foreclosed upon. Investment hucksters these days are striking it rich targeting families desperate to recoup their losses of the past five years.  

Scams like this Florida-based operation, involving outrageous investment promises and promoters with obviously questionable past dealings are hardly news. Regulators and law enforcement continue to be seemingly inept at shutting them down. Every day investors lose their hard-earned savings to charlitans that so reek of fraud that it’s hard for me to imagine how anyone of sound mind could have trusted the crooks. On the other hand, I’ve investigated billions of wrongdoing and trillions of assets, where the fraud is far less obvious. Most of my efforts are directed toward Wall Street household names that skim billions out of accounts invested in toxic investment products the firms have created, slowly, as opposed to stealing it all at once. As I advised would-be scammers last year, “don’t grab all the money at once, slowly bleed the accounts. It’s far safer to skim 10% annually than grab 100% all at once. The former is Wall Street and the latter, Madoff.”

Bottom line: From Fortune 500 companies to con men, these days you have to be more diligent than ever to avoid being duped. Don’t expect any governmental agency or law enforcement to proactively ferret-out the abuses. Ever-innovative scammers moving at warp speed are miles ahead of the cop tortoises. Whether regulators can effectively respond to allegations of wrongdoing brought to their attention is even an open question.   

For would-be crime fighters, it’s daunting to figure out what to do when made aware of even the most straightforward of scams, a Ponzi scheme. To whom, how and when to report the fraud are all difficult questions. Don’t expect to be greeted with open arms; delay and neglect are far more likely.

Friday I reported the scam to the SEC via its whistleblower tip online service; I called and left a voicemail message for the head of the Whistleblower Office and I sent him an email. This is, in my expert opinion, an urgent matter. After months of delay, the promoters have run out of time and excuses.

“These guys have more stories than the Empire Empire State building,” observed the husband. Real people have been seriously harmed. Hopefully, I’ll hear from the SEC someday.

I also called the Florida Office of Financial Regulation, Bureau of Securities Enforcement in Tallahassee and, within hours of leaving a message, received a return phone call. My tip will be directed to an investigator in the West Palm Beach office. The investigator explained that since Ponzi schemes are proliferating, I may experience delays.

With everyone so busy, it sure is hard for a whistleblower to get heard.

Source Article from http://www.forbes.com/sites/edwardsiedle/2013/05/06/slow-blow-blowing-the-whistle-at-sec-on-yet-another-ponzi-scheme/
Slow Blow: Blowing The Whistle At SEC On Ponzi Scheme Takes Time
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Slow Blow: Blowing The Whistle At SEC On Yet Another Ponzi Scheme

English: Mug shot of Charles Ponzi (March 3, 1...

English: Mug shot of Charles Ponzi (March 3, 1882 – January 18, 1949). Charles Ponzi was born in Italy and became known as a swindler for his money scheme. His aliases include Charles Ponei, Charles P. Bianchi, Carl and Carlo. Italiano: Foto segnaletica di Charles Ponzi. Charles Ponzi (Lugo, 3 marzo 1882 – Rio de Janeiro, 18 gennaio 1949) è stato un truffatore italiano. Immigrò negli Stati Uniti, dove divenne uno dei più grandi truffatori della storia americana. (Photo credit: Wikipedia)

Last week over margaritas and nachos with a couple who are friends of mine, I learned that they apparently have lost the entire down payment on a house they were poised to buy, as a result of investing in a supposed corporate bridge loan scheme that promised astronomical returns of 30% or more. The investment had been recommended to them by business associates who invested far greater amounts. It looks like the scheme may involve millions.

This is not the first time my friends were victimized by fraudsters. Last year they were victims of the Zeek Rewards Ponzi scheme, an equally dubious enterprise that bilked investors out of an impressive $600 million.  These investment setbacks have made it all the more difficult for this couple to rebuild their credit after the 2008 real estate bubble burst and their home was foreclosed upon. Investment hucksters these days are striking it rich targeting families desperate to recoup their losses of the past five years.  

Scams like this Florida-based operation, involving outrageous investment promises and promoters with obviously questionable past dealings are hardly news. Every day investors lose their hard-earned savings to rip-off artists that so reek of fraud it’s hard for me to imagine how anyone of sound mind could have trusted the crooks. On the other hand, I’ve investigated billions of wrongdoing and trillions of assets, where the fraud is far less obvious. Most of my efforts are directed toward Wall Street household names that skim billions out of accounts invested in toxic investment products the firms have created, slowly, as opposed to stealing it all at once. As I advised would-be scammers last year, “don’t grab all the money at once, slowly bleed the accounts. It’s far safer to skim 10% annually than grab 100% all at once. The former is Wall Street and the latter, Madoff.”

Bottom line: From Fortune 500 companies to con men, these days you have to be more diligent than ever to avoid being duped.

Further, it’s daunting to figure out what to do when made aware of even a straightforward Ponzi scheme. Who, how and when to report the fraud are all difficult questions.

Friday I reported the scam to the SEC via its whistleblower tip online service; I called and left a voicemail message for the head of the Whistleblower Office and I sent him an email. This is, in my expert opinion, an urgent matter. After months of delay, the promoters have run out of time and excuses.

“These guys have more stories than the Empire Empire State building,” observed the husband. Real people have been seriously harmed. Hopefully, I’ll hear from the SEC someday.

I also called the Florida Office of Financial Regulation, Bureau of Securities Enforcement in Tallahassee and, within hours of leaving a message, received a return phone call. My tip will be directed to an investigator in the West Palm Beach office. The investigator explained that since Ponzi schemes are proliferating

I may experience delays.

With everyone so busy, it sure is hard for a whistleblower to get heard.

Source Article from http://www.forbes.com/sites/edwardsiedle/2013/05/06/slow-blow-blowing-the-whistle-at-sec-on-yet-another-ponzi-scheme/
Slow Blow: Blowing The Whistle At SEC On Yet Another Ponzi Scheme
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Does BNY Mellon Really Believe Hedge Funds Are No Riskier Than Traditional Investments?

One Mellon Center in downtown Pittsburgh, Penn...

One Mellon Center in downtown Pittsburgh, Pennsylvania. (Photo credit: Wikipedia)

As the former compliance director of one of the nation’s largest money managers, I was puzzled by a recent letter published in the Providence Journal by Roger Begin, former Rhode Island Treasurer and Vice President of BNY Mellon Wealth Management, defending the current state treasurer’s decision to invest 25% of the state pension’s assets in high-risk, high-cost hedge funds.

Included in his ranting, Begin stated that I was naĂŻve and wrong to believe that hedge funds are riskier than traditional investments.

Wow.

Did his employer, BNY Wealth Management, really believe that hedge funds do not present greater risks? Did the money management firm authorize him to assure the public as to the safety of hedge funds? There was no disclaimer indicating that the views expressed were purely his own and not those of BNY Mellon. The letter did, however indicate that BNY acts as a custodian of some securities in the Rhode Island state pension plan but has no investment-management role in the plan.

I get that the former state treasurer, employed in the financial services industry, wants to defend the current state treasurer – who happens to be a client of BNY.

Begin is certainly entitled to his own opinion, even if it is contrary to well-settled federal and state securities law, but when he, as a representative of BNY Wealth Management, starts telling investors hedge funds are as safe as traditional investments, I’m more than a little concerned. The following day, I submitted this curt response to the Providence Journal:

“Mr. Begin, please confirm that BNY Mellon Wealth Management (your employer) and BNY (the paid custodian of some securities in the Rhode Island state pension plan), disagree with the opinion of regulators (and me) that alternative investments are, in fact, riskier than traditional investments.

Let me remind you that in 2012, a BNY Mellon subsidiary paid $210 million to settle lawsuits for advising clients to invest in a “safe” fund managed by Bernie Madoff. I certainly hope that BNY Wealth Management is not, at this time, advising clients that hedge funds are safer than traditional investments. Your employer should know better.

Is BNY Mellon verifying the values of the alternative investments in the fund, or merely relying upon the money managers handling these investments (who are potentially conflicted and likely to inflate the valuations)? Will BNY compensate pensioners if these valuations turn out to be bogus? If not, then who will protect against this well-known risk of alternatives?”

While I never received a response from Begin, here’s what Kevin Heine, the media contact at BNY Mellon had to say about Begin’s letter: “The views and opinions expressed by Mr. Begin reflect his personal views.  His personal commentary in no way represents BNY Mellon’s views. I hope this helps clear up any questions regarding his commentary.”

Fair enough.

Mr. Begin, as a state treasurer you may have grown accustomed to making public pronouncements about investment matters willy-nilly and without challenge. That’s just politics, not the highly regulated world of money management. As an employee of a prominent investment firm, best to check with your firm’s compliance director before assuring investors hedge funds are safe.

Source Article from http://www.forbes.com/sites/edwardsiedle/2013/05/03/does-bny-mellon-really-believe-hedge-funds-are-no-riskier-than-traditional-investments/
Does BNY Mellon Really Believe Hedge Funds Are No Riskier Than Traditional Investments?
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Investor Alert: Private Oil and Gas Offerings

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Source Article from http://www.sec.gov/investor/alerts/ia_oilgas.pdf
Investor Alert: Private Oil and Gas Offerings
http://www.sec.gov/investor/alerts/ia_oilgas.pdf
http://www.sec.gov/rss/investor/alertsandbulletins.xml
SEC.gov Updates: Investor Alerts and Bulletins
The SEC’s Office of Investor Education and Advocacy provides a variety of services and tools to address problems you may face as an investor. These Investor Alerts and Investor Bulletins, focused on topical issues including recent Commission actions, are provided as a service to investors.

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Rhode Island State Pension Admits History Of ‘Pay-To-Play’ And SEC Inquiry

Seal of the U.S. Securities and Exchange Commi...

Seal of the U.S. Securities and Exchange Commission. (Photo credit: Wikipedia)

State Treasurer’s Office Now Says Pension Paid Placement Agents

In its December 2012 cover story praising Rhode Island Treasurer Gina Raimondo for reforming the state’s pension, Institutional Investor magazine observed that it was striking that the Rhode Island retirement system has never faced charges of corruption given the tradition of “pay-to-play” in many U.S. public funds and the state’s history of government scandal. That may be about to change.

Late last week, in response to my request for information regarding “pay-to-play” related to the state pension’s investments, the Treasurer’s office confirmed my suspicion that, unbeknownst to Rhode Islanders, secret payments to placement agents, commonly referred to as “kick-backs” had occurred in the past. Probing further, I was told the SEC had confidentially contacted the pension requesting information about these questionable payments.

How much money are we talking about? I was told that one placement agent fee alone amounted to $500,000. That’s a lot of money for doing little more than influence-peddling. It will be interesting to learn the total amount of pension dollars squandered; when these questionable payments were made; what, if any, efforts were made to recover these amounts once discovered; and, perhaps most important, the identities of the parties receiving the payments.

The Treasurer’s office agreed to provide me with the relevant documents within a week and I will undertake a review of past, as well as any recent payments to intermediaries by the pensions’s money managers shortly.

Forensically investigating pay-to-play in Rhode Island is far more complex than in other states because the Employees’ Retirement System of Rhode Island is exposed to greater, unique risks. At least three potential kick-back scenarios must be scrutinized.

  1. Whether the money managers hired by the pension made secret payments to any intermediaries not related to the pension?
  2. Whether the managers made payments to any investment consultant serving as a fiduciary adviser to the pension that recommended them. (Recall in a previous article I mentioned that Cliffwater LLC, the fund’s investment consultant, discloses in regulatory filings that it does receive compensation from hedge funds it recommends to pensions.)
  3. Whether the money managers made any payments, directly, or indirectly to Engage RI, the political action committee that supports the current chief fiduciary of the pension.

Secret payments made by the pension’s money managers or other investment services providers, such as the custodian to the fund, to any of the potential parties mentioned above at a minimum undermine the integrity of the pension’s investment program and almost certainly detrimentally impact investment performance. That’s why we care about pay-to-play.

There’s no such thing as harmless kick-backs. Don’t let anyone tell you otherwise.

For now, let me provide readers some background on placement agents and pay-to-play, and elaborate upon why these practices are so harmful to pensions.

Placement agents are intermediaries or middlemen paid by money managers to market and sell their investment products. Placement agent fees are paid directly by money managers and indirectly by investors, e.g. pensions, through higher money management fees than would be available if no compensation arrangement existed between the manager and the intermediary.

Under the economic theory of “disintermediation,” removal of the intermediary from the process, i.e., “cutting out the middleman,” reduces the cost of the service to the customer. To most consumers this concept is obvious; money managers and placement agents would have you think otherwise.

Customers usually figure out how to eliminate the middleman in highly transparency markets, such as buying carpeting from a wholesaler or buying online. Markets lacking transparency, like hedge funds and other alternative investments, often are plagued by undisclosed and dispensable intermediaries. What the customer doesn’t know can hurt hm.

Our federal securities laws generally require that traditional money managers registered with the SEC, when employing the services of third party solicitors, provide the client with a written disclosure document, commonly referred to as a “solicitation agreement,” describing the terms of any compensation arrangement between the solicitor and the investment adviser, as well “the amount, if any, for the cost of obtaining his account the client will be charged in addition to the advisory fee.” These requirements reflect the SEC’s belief that the investment advisory client should be advised of the existence of the intermediary, the fees paid to the intermediary and whether he is paying a higher fee as a result of the intermediary.

I have worked on cases where the SEC required money managers utilizing “secret agents” as marketers to offer public pension investors return of principal invested plus all fees paid. That’s called “rescission” or unmaking of the contract between the manager and in the investor. In my opinion, such as response by the SEC, or by a pension that has been victimized by a secret arrangement, is appropriate.

Alternative assets, such as private equity, hedge fund and real estate investments, by definition lack the transparency and liquidity of traditional, publicly-traded assets. Worse still, the fees related to managing alternative assets are exponentially higher (100 times greater) than traditional asset classes. Charging exorbitant money management fees permits these managers to pay much higher commissions to intermediaries who raise capital for them.

There’s a reason alternative investments sell so briskly and the reason is, these funds pay outrageous selling commissions or placement fees.

The arrangements alternative asset managers establish with placement agents to market their services also often lack the transparency common to traditional investments. You may not even know when someone’s being compensated for steering you into an investment. The role and compensation of placement agents related to alternative investments has become a highly controversial issue in recent years as interest in investing in alternatives has grown.

As a result of underfunding and stagnant market returns, public pensions, in particular, have significantly increased their allocations to alternative investments. While use of placement agents is not limited to money managers seeking investment from public pensions, revelations regarding pay to play schemes related to public funds have been widely reported in Florida, Kentucky, Illinois, New York, California, Ohio and New Mexico.

Placement agents are retained by investment managers to raise capital and are compensated by managers based upon the amount of money they raise. Some placement agents have an exclusive focus on a particular type of investor, such as high net worth individuals, institutional investors or even public pensions. While placement agents and investment managers that retain them may claim that placement agents provide valuable services to institutional investors, such as access to investment funds, don’t believe a word.

Source Article from http://www.forbes.com/sites/edwardsiedle/2013/04/29/rhode-island-state-pension-admits-history-of-pay-to-play-and-sec-inquiry/
Rhode Island State Pension Admits History Of ‘Pay-To-Play’ And SEC Inquiry
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Educating Gina Raimondo, Rhode Island’s Wall Street-Friendly State Treasurer

RI summer homes by the coast

RI summer homes by the coast (Photo credit: Wikipedia)

Rhode Island’s State Treasurer Needs to Learn More About How Wall Street Conflicts of Interest, High Investment Fees and Risky Hedge Funds Harm Pensions 

It’s not hard to understand why the private equity industry would choose Rhode Island Treasurer Gina Raimondo to be the public face of their local, as well as national campaign to supposedly “reform” public pensions by steering trillions of government workers’ retirement savings into high-cost, high-risk, illiquid alternative investments.

For what it’s worth, she clearly was an exceptional student, attending Harvard, Oxford and Yale Law.

However, as I learned even before joining the SEC upon graduation from law school, i.e., during a summer internship at the Commission, impressive educational credentials are not at all predictive of investment acumen. Indeed, often individuals who have experienced great success in school develop an inflated sense of their own capabilities and an unhealthy, sometimes voracious, sense of entitlement. In the investing arena, these wiz-kids are prone to delude themselves, as well as others, into thinking that their “book smarts” will equate to “(Wall) street smarts.” More-often-than-not, things go awry.

In addition to her impressive, yet largely irrelevant, educational background, Raimondo was also the perfect choice to lead the private equity assault on public funds because she has only limited knowledge of pensions and knows even less about private equity.  For her private equity campaign supporters this means that she can be fed and will parrot any misinformation the industry feeds her to the electorate. Hedge funds safe? Private equity worth the hefty fees? You betcha.

In short, impressive educational credentials and limited knowledge of investment industry realities made Raimondo ideally suited to champion private equity’s public pension money grab.

In hopes of educating Gina, let me offer the following wisdom about pensions and investments, largely from the mouths of pension regulators.

Pension Adviser Conflicts of Interest Undermine Performance

The investment consultant retained by the Treasurer to review and recommend hedge funds, Cliffwater LLC, indicates in its SEC filings that it receives compensation from the very investment managers it recommends or selects for its clients. A conflict of interest arises under these circumstances because the consultant may recommend managers to the pension based upon such compensation it receives, as opposed to investment merits.

In recent years the U.S. Department of Labor, the Securities and Exchange Commission, and the General Accountability Office have each publicly acknowledged that conflicts of interest related to firms that provide investment services to pensions are widespread, and that these conflicts have resulted in reduced returns and higher fees for retirement investors.

More recently, Phyllis C. Borzi, Assistant Secretary of Labor of EBSA, told the Wall Street Journal of widespread conflicts of interest in the marketplace for retirement advisory services. She went on to state that there is a good deal of evidence that these conflicts have resulted in reduced returns and higher fees for retirement investors, as reflected in the DOL’s own investigations and cases, the SEC and the GAO reports, published securities cases, academic literature, and other sources.

My firm worked extensively with the SEC, the DOL and the GAO since 2003 related to their investigations of conflicts of interest and malfeasance in the pension industry. Our investigations have consistently revealed that breaches of fiduciary duty by financial advisers and vendors to pension plans result in substantial, quantifiable harm.  That is, conflicts of interest, unethical business practices, and undisclosed compensation agreements that are pervasive in pension investment management undermine the integrity of pension investment processes and detrimentally impact performance.

Further, such industry abuses may contribute to the demise of pension plans. Indeed, a 2007 study by the GAO revealed that one form of industry abuse alone affecting pensions with over $4.5 trillion in assets – pension consultant conflicts of interest – can undermine a pension plan’s investment performance by 1.3% annually. Many other breaches of duty, such as those related to securities trading, money managers, and custodians (which the GAO did not examine), I have found to also be harmful to pensions.

Given that Rhode Island’s recent investment performance is in the low single digits, a potential loss of 1.3% due to pension consultant conflicts of interest should be taken seriously.

Investment Fees Pensions Pay Do Matter—A Lot

While the Treasurer recently stated she doesn’t know the amount of the investment fees the pension she oversees pays and has suggested that fees are not an important consideration, she might learn from what the Department of Labor (which oversees corporate pensions) has to say about the importance of fees.

“Plan fees and expenses are important considerations for all types of retirement plans. As a plan fiduciary, you have an obligation under ERISA to prudently select and monitor plan investments, investment options made available to the plan’s participants and beneficiaries, and the persons providing services to your plan. Understanding and evaluating plan fees and expenses associated with plan investments, investment options, and services are an important part of a fiduciary’s responsibility. This responsibility is ongoing. After careful evaluation during the initial selection, you will want to monitor plan fees and expenses to determine whether they continue to be reasonable in light of the services provided.”

Any so-called reform of the state pension which involves exponentially increasing (100xs) the investment fees is disingenuous and doomed to fail, in my opinion.

Source Article from http://www.forbes.com/sites/edwardsiedle/2013/04/23/educating-gina/
Educating Gina Raimondo, Rhode Island’s Wall Street-Friendly State Treasurer
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