Benefits June 3, 2005

CalSTRS Board Kicks Off Shortfall Review

June 3, 2005 (PLANSPONSOR.com) - With a consultant's warning ringing in their ears that their current $24.2 billion shortfall could balloon to more than $200 billion in 30 years, trustees of the California State Teachers' Retirement System (CalSTRS) have started work on a plan to tackle the problem.
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The process will include a review next month of how other public pension systems are dealing with their shortages and is expected to wrap up by fall with a strategy that could call for higher teacher or employer contributions or benefit cutbacks for newly hired educators, the Sacramento Bee reported.

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Efforts to cope with the shortfall at the $124-billion fund come even though CalSTRS has enough money to pay benefits for 20 years and despite an acknowledgment that retiree benefits won’t be harmed because the Golden State guarantees them by law, the news report said.

At the same time, like most public pension funds across the country, CalSTRS isn’t projected to generate enough income from investments or employee and employer contributions to meet its long-term pension obligations. As of June 30, 2004, the fund had enough assets to cover 83% of future benefits, compared with 82% the previous year.

According to the Bee report, consultant Milliman estimated that CalSTRS, which has 755,000 members, needs to boost contributions by as much as 4.56%. Currently, teachers contribute 8% of salary while school districts add 8.25% and the state about 2%. Milliman said that without any contribution hike, the CalSTRS shortfall would hit $217 billion by 2035.

“The longer we wait, the more expensive it gets,” said Jim Zerio, a representative for CalSTRS trustee and state Treasurer Phil Angelides, according to the Bee.

CalSTRS officials said Thursday that the gap won’t vanish even if Governor Arnold Schwarzenegger is successful in his plan to end traditional pensions. Schwarzenegger and other Republican leaders advocate replacing guaranteed pensions with self-directed 401(k)-style investment accounts for future public employees, including teachers. They cite a growing pension obligation burden on the state and local governments.

“We don’t need to panic,” said Nick Smith, a CalSTRS representative for state Controller Steve Westly. “But we do need to act. There’s a problem we all need to solve.”

A year ago, trustees first learned that a string of stock market losses and subpar investment returns in recent years had left the fund billions of dollars short to pay benefits for retirees over the long haul. After reviewing options to erase the shortfall, the board opted to call for another actuarial study.

The Milliman report found little has changed 12 months later. The shortfall increased $1.05 billion to $24.2 billion. But CalSTRS’ assets grew faster than liabilities because of smaller wage increases.

More information on the CalSTRS efforts and a copy of the Milliman report is here .

Administration June 2, 2005

Fund Ownership Costs Wane

February 18, 2004 (PLANSPONSOR.com) - Despite high-profile reports to the contrary in the recent months, one industry group is saying the average cost to own mutual fund shares has gone down over the past few years.
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The Investment Company Institute (ICI) says the misconception about mutual fund fee is due in part to how industry analysts have overlooked certain key aspects to mutual fund cost.   These factors include structural changes in mutual funds over the past two decades – such as some shareholders paying additional charges for financial advisor advice and service – the 20-fold increase in the number of people holding mutual funds since 1980 and the proliferation of funds, and thus, many smaller funds that are unable to maintain the same “savings from scale economies that older, larger funds have experienced.”

As evidence of its contention, ICI points to an examination of the numbers though shows the average costs of ownership have continued to decline since 1980.   The average cost – an aggregate that includes a sales-weighted average of the expense ratio and the annuitized loads paid by shareholders – has gone down over a two-year period from 2000 to 2002 across all categories of mutual funds.   Equity funds reported an average cost of 1.25% in 2002, down from 1.35% in 2000, bond funds were at 0.88% in 2002, lower than 2000’s 0.90% and money market funds stood at 0.34%, lower than 0.42% in 2000.    Looking back over a 20-year period, the average cost in 1980 for equity funds was 2.26%, bond funds 1.53% and money market funds 0.55%.  

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Adding a financial advisor to the fray though skews the average cost numbers up, ICI found.   Since financial advisors provide untold number of extra services to their clients investing in mutual funds, these investors are often dinged with extra charges in the form of sales loads and annual 12b-1 fees, even though ICI does not include “loads” to this expense ratio equation, since they are “a one-time charge.”  

The main culprits of higher fees among funds though, according to ICI, are 12b-1 fees included in the expense ratio.   ICI found approximately one-third of the variation in equity fund expense ratios and three-quarters of the variation in bond fund expense ratios are due to 12b-1 fees.    This in turn can be significant, since ICI found that two-thirds of equity and bond mutual funds, sold outside of an employer’s retirement account, carry a sales load with them, a class that represents any fund charging a 12b-1 fee greater than 25 basis points.

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