“But, 50 Years Ago You said…”

I wrote a blog post last week titled, “Change Is Good – Really”, which was penned to address the reluctance on the part of asset consultant research teams to appreciate the need for evolutionary change within an asset manager’s investment process. Here I go again, but in this case, I am referring to an experience that I had just yesterday when presenting to the “Investment” committee for a couple of local unions.

KCS was invited to meet with this group after presenting to a broader group of Trustees for the same two plans in October. The purpose of both meetings was to share with them how critically important it is for plan sponsors to become more aware of their plan’s liabilities (the promise) on a basis much more frequently than once per year. As those that follow KCS know, we believe that a plan’s funded status should drive asset allocation and investment structure decisions, not the return on asset assumption (ROA), which is not reflective of anything going on within the plan.

Before having the opportunity to begin our presentation, I was asked by the plan’s asset consultant to put in layman’s terms what the end game was behind our recommendation. I began by stating again that managing a pension plan should have a cost objective and not one based on return. That by focusing on return, the retirement community has injected too much risk into a process without achieving the desired results, those being a fully-funded plan at modest contribution expense.

At that point, one of the more experienced trustees stated, “50 years ago you (I’m assuming the industry, since I was in the second grade at that time) said that we should build a diversified portfolio of stocks and other investments. Are you saying that was wrong?” Yes, and the trustees (and our industry) should have come to that conclusion a long time ago, too. The DB plans in question have funded ratios (at a true mark to market discount rate) of 62% and 49%. If now is not the time to explore alternative approaches, then when is it appropriate?

Regrettably, DB plans are going away, but they don’t have to. There are strategies that can be utilized that will protect and preserve the promise that has been made to the participants. As a nation, we cannot afford the profoundly negative social and economic consequences of our failure to preserve these important retirement programs. The failure of DC plans to build adequate retirement balances for the “average” participant certainly highlights this fact!

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