Kiss your Pension Fund Good-Bye

Guest Post by Martin Armstrong

supremecourt

I have been warning for some time that government was eyeing up pensions.The amount in private pension funds is about $19.4 trillion. The question that has been debated in secret behind the curtain is how to justify to the people taking that over. I have been warning that if this is seized by government, it will come after 2015.75. Just how that is to be accomplished was finally settled by the Supreme Court without any justification constitutionally.

The US Supreme Court ruled last week in the unanimous, 8-page decision in Tibble v. Edison holding that employers have a duty to protect workers in their 401(k) plans from mutual funds that are too expensive or perform poorly. That is simply astonishing since there is no constitutional requirement for even government to provide social benefits. The Supreme court held in HARRIS v. McRAE, 448 U.S. 297 (1980) it was explained that the constitution is negative not positive. There is no duty imposed upon the state to provide a program for that would convert the constitution from a negative restrain upon government to a positive obligation to provide for everyone.

If we take the fact that the constitution is NEGATIVE and was a restrain upon government, then this latest ruling is completely unfounded. Monday’s unanimous ruling sends a warning to employers that they now must improve their plans and it is now an obligation to project employees. This comes just in time for then the next step is government to seize private funds and prosecute employers who choose badly a fund manager. This fits perfectly just in time for the Obama administration’s next assault as they prepare a landmark change of its own by issuing rules requiring that financial advisers put the interest of customers ahead of their own. This creates a very gray area wide enough to justify public seizure of pension funds under management.

This ruling will have a dramatic impact upon investment management and we have already received calls asking about using our model for management purposes since it has one of the longest track records that can be verified in the industry. What this ruling imposes is a tremendous duty upon the plan fiduciary who must ow back up his decision with proof. This may also have the impact of foreclosing new fund managers from entering the business since they will lake the track record.

Yet this decision is even deeper. It sets the stage to JUSTIFY government seizure of private pension funds to protect pensioners. When the economy turns down and things get messy, they are placing measures in place to eliminate money in and physical dimension, closing all tax loopholes, shutting down the world economy with FATCA, and preparing for the final straw of Economic Totalitarianism with the Supreme Court reversing its entire construction of the Constitution to impose a duty upon employers to ensure the 401K plans perform in a world where interest rates are going negative. You really cannot make up this level of insanity.

The message here is not that all 401(k)s are bad or too expensive. In fact, costs have fallen 30 percent over the past decade as more plan sponsors turn to low-cost passive investing options. But this can be highly dangerous for to lower costs they turn to government debt where there is no need for fund management decisions. Yes, when I did hedge fund management, the cost was 5% annually plus 20% performance. That cost went to staff around the world that had to monitor positions and the world economy on a 24 hours basis. You paid also NOT to trade for most losses took place when traders were bored are would trade to try to make money when there was nothing to be done. Our track record was the best ever in the industry with the lowest drawn down perhaps in fund management. But that risk reduction cost money.

Today, costs vary widely. Plans with more than $100 million in assets usually have total annual costs below 1% whereas the biggest plans usually are below 0.50%. In small plans, the costs can be as high as 2% today. The focus is now on cost – not performance.

Financial service companies can charge a range of management, administrative, marketing, distribution and record-keeping fees for 401(k) plans. Plan sponsors can assume the costs, but employees are paying at least 85% of all fees typically. It is true that most workers do not know they pay the bulk of the share of costs. A 2011 AARP survey found that 71% of retirement savers do not think they pay any investment fees at all. It is true that the fees make a huge difference in returns over time. However, this drive to lower costs has also lowered the quality of funds management.

The U.S. Department of Labor estimates that a 1% point difference on a current account balance of $25,000 will reduce total accumulations by 28% over 35 years, assuming average returns of 7% and no further contributions. The focus is all on these management fees without any consideration of the problem. Trying to manage money varies according to the size of the fund. The more you gather, often the lower the performance because the markets are not unlimited. You can pick up the phone and say “sell at the market” when you have a $100 million fund, you cannot do that with a $100 billion fund. So the management fee was also a means to reduce the number of clients and it was never a question of unlimited capacity to trade. The numbers on performance would decline with greater amounts of money under management for the manager lost flexibility.

The Supreme Court case clearly shows that lack of understanding of the industry yet the battle centered on the 401(k) plan’s use of retail-class mutual funds when less-expensive institutional shares were available. The difference between those classes typically is 25 basis points. This will now  put pressure on large plans to cut costs further but will not have much impact on smaller plans. That is because big plans have the buying power to negotiate better deals but at the same time they are the easy target for lawyers making them much more attractive targets for litigation.

Cutting management fees to the bone may in fact set the stage for massive losses for many of the older better traders are now just resigning. The quality of the funds management is more likely than not going to decline noticeably.

Between the court ruling and the Obama administration’s push for stronger fiduciary rules send a strong message that government can much easier seize the pension fund management industry of course to “protect the consumer”.

8
Leave a Reply

avatar
  Subscribe  
Notify of
bb

Stucky , this means you are going to have to go back to WORK. No more lazy in around for you anymore big boy.

None of you are going to retire from your jobs and if you do.:no pensions , no social security and the money you do have will be worthless.Welcome to your 4th turning future .If it makes you feel better I will be working the rest of my life.Glad all of you are joining me.

EL Coyote
EL Coyote

bb says: Welcome to your 4th turning future

bb, stop being such a Debbie Downer. I-S says with his philosophy, we can embrace the 4th turning and marvel at the opportunity it affords us for new experiences.

bb

El Coyote , IS is an idiot. He also lives in Spokane Washington. When things go side ways during this 4th turning as they always do he thinks he will just go hide in the woods and play soldier boy.He will be on the verge of starvation in 3 weeks. His wife will be demanding they go back into the city because at least they might have clean drinking water and electricity. There are millions of people just like IS.

Jim
Jim

I’m a reasonably person and I don’t get the article or the reasoning. As a person with a pension, obviously the title of said article made me hurry up and open and peruse. But in a nutshell, it would appear that if the economy goes down the tubes, the government now has a right to seize your pension. I have read this many times before, along with all your cash, gold,etc. So what? If the economy tanks as bad as they speculate ( and I happen to agree that the economy and stock market will tank), what are you really losing? Your pension/401K will be worthess and/or insolvent anyway. We will all have bigger things to worry about. Happy Memorial day. Out.

taxSlave
taxSlave

Fiar junk money is the problem.

Honest commodity money is the solution. After the collapse, we must renumber this.

taxSlave
taxSlave

REMEMBER

Homer
Homer

Jim–Good points. My take is this:

The gov doesn’t need your pension, you do. The gov can print up all the money it wants under certain circumstances. The gov is limited by other countries who hold dollars. We have the reserve currency and other countries hold dollars in their treasuries. They don’t want those dollars to depreciate or those dollars may just come flooding back here. That is a restraint on dollar printing.

However, I think that the gov is anticipating inflation and consequently price inflation. If you know that tomorrow the price of beef is going to double you will spend your money today to buy beef that you know is going to be more expensive tomorrow. That will have the result of increasing demand and beef prices will meet that demand with even higher prices. A Spiral up in prices as people bid more and more for beef.

This has the effect of the dollar being worth less and less. This is a feeding frenzy, there is a loss of confidence in the dollar. It is called Hyper-inflation. Hyper-inflation is different than inflation. One is psychological and one is monetary.

If you don’t have access to your money, you lose the ability to bid up the price of beef. The gov will restrict the availability of your money. You won’t be able to draw money out of your 401K or pension fund. You will be given a meager existence. People, listen up, it is a form of rationing.

All markets are rationed as there is more money (demand) than ‘goods’. The question is who does the rationing? In ‘free marketism’ price does the rationing. A person with more money can bid a ‘good’ away from someone who has less money or no money. This doesn’t set well with Progressives (Socialists). “Why should someone who is poor through no circumstances of their own be penalized”, they say. So, Central Planners end up rationing ‘goods’ based upon their whims. A few making decisions for the many.

There will be rationing, the question is whether the market or the gov rations. There is inequality in the distribution of ‘goods’ if the market rations, yes, but there is a greater inequality in the distribution of ‘goods’ with a commensurate greater evil if Central Planners ration. Stalin, Hitler, and Mao come to mind.

I think that the gov wants to control your ability to demand ‘goods’ to keep the coming inflation that they see from spiraling into a hyper-inflation. That what this is all about as well as the war on cash and bail-ins. They may in their draconian way search your house and if you have two cans of soup, take one.

Anonymous
Anonymous

Bawnney Fwank, Dem said the gov should get all Americans inheritance, “Why not?” He boasted with marbles in his mouth charm.He was always openly cheesey smarmy,and put one of his boy toys in charge of Fanny May.

Discover more from The Burning Platform

Subscribe now to keep reading and get access to the full archive.

Continue reading