Delaying Pension Investment Decisions Can Be Costly

Market forces are causing some pension fund officials to seize investment opportunities more quickly while others are moving more cautiously.

330x160-pensions.jpg

Defined benefit plans have never been the most nimble of investors. Major decisions about changing asset allocation or money managers must be made by the corporate investment committee, which traditionally meets only once per quarter.

However, the last two years have upended the rules of the marketplace in many ways. Have pension funds been swept along by the tide and shifted strategy too rashly? Or maybe they should move faster, but they’re still stuck in their old mindset?

Two consultants have two very different analyses.

Judging by a survey released by the New York-based benefits consulting firm Mercer in June, plans are being too cautious and losing money. Over half of the 124 pension plans surveyed said they were taking one to three months to make a decision about changing their asset allocation or manager, and about 25 percent said they tarried even longer. That might seem in line with the corporate investment committee’s once-a-quarter schedule. But Kim Plummer, Mercer’s head of implemented consulting in the United States (more on what that means in a minute), says that discussions with clients show that this is a slower pace than before 2008. Mercer has no exact data, because it never conducted a formal survey until this one.

More important, 21 percent of the plan sponsors said they had lost investment opportunities by delaying. (Mercer did not ask for details about what sorts of opportunities or how much in lost opportunity costs.) “The practice of evaluating investment strategy infrequently carries great risk, especially given how quickly markets are moving in the present environment,” Plummer warns.

Not so fast. (Or slow.) Gino Reina, a senior vice president at Segal Advisors, says that he has noticed plan sponsors moving more quickly. “In the past it might take the investment committee two or three meetings to do something. Now they’ll get together between meetings,” he explains.

Sponsored

However, just to complicate matters further, Reina’s speediness is slower than Mercer’s dallying. “It used to take nine months to a year, and now on average it takes six months” to make these investment policy changes, he says.

Okay, why are either—or both—of these trends happening?

Plummer argues that the market crash, along with new accounting rules that require companies to show the impact of their plans’ status on their financial statements, have made sponsors more cautious. “There’s more analysis, weighing the risks of making the wrong decisions,” she says.

In addition, investment choices have become more complex. Yet in an era of cost-cutting, companies have been taking the ax to their pension investment staffs, rather than slice into their core businesses, according to Plummer. When Mercer asked the 124 companies, nonprofits, and government agencies in its survey whether they planned to add to their pension investment work force, not a single one answered yes.

Net result: A reduced staff is taking more time to agonize over decisions, thus causing a delay in bringing the issues to the investment committees, which are then taking longer to agonize over the decisions again.

Now here’s Reina’s explanation: While plans are still sticking to their long-term strategy, “a lot of opportunities are now within the alternative space, with closed-end funds.” And these funds, by definition, require a quick decision, usually within three to six months. There’s no time for the committee to fiddle around.

Mercer has a certain vested interest in finding problems with plan sponsors’ decision making, because that’s how Plummer hopes to get more “implemented consulting” business. Going beyond the traditional role of a consultant, who recommends managers and asset classes, Plummer and her staff take on the fiduciary responsibility of actually making the hiring, firing, and investment decisions. A Mercer spokesperson claims the firm could, for instance, “alter the asset allocation without the delay of a committee meeting.”

Whether plan sponsors are actually moving slower or faster, the recession hasn’t changed the basic rules. Of course pension officials need to be alert to new opportunities, but they also have the fiduciary responsibility to do their due diligence. And, as they are always telling their employees, they shouldn’t panic just because the market is slipping at the moment. Saving for retirement is a long-term strategy.

Fran Hawthorne is the author of the award-winning “Pension Dumping: The Reasons, the Wreckage, the Stakes for Wall Street” (Bloomberg Press) and “Inside the FDA: The Business and Politics behind the Drugs We Take and the Food We Eat” (John Wiley & Sons). She writes regularly about finance, health care, and business ethics.

Related