Friday, October 20, 2023
State and local government pensions assure workers and retirees that they enjoy the same protections as the comprehensive federal law, ERISA provides to corporate participants. That’s simply not true. Don’t count on state law to protect your retirement security.
It has been said that the Law is a blunt instrument, incapable of dealing with all shades and circumstances, with little or no regard for individual situations.
Management of pensions is doubly complex because equal parts of law and investing are involved. Typically, those knowledgeable regarding pension law, lack investment expertise and vice versa. Lawyers, judges and regulators rarely understand investment theories, strategies and practices well enough to sort through the nonsense and make sound decisions. They are regularly misled by savvy Wall Streeters intent upon selling dicey financial products. Even well-intentioned investment experts rarely grasp nuances which can have severe legal consequences.
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Sadly, pension overseers are often the most clueless of all regarding both pension law and investing.
Further, the world of investing is fluid—ever-changing. New investment products and practices emerge and old schemes come back into vogue every few years. The law moves slowly—the law does not, and possibly cannot, supply clear, timely answers for every pension management question that arises.
Derivatives? Private equity/credit? ESG? Bitcoin? Chances are, these investments are in your pension.
Due to ever-changing investment alternatives, the law does not supply clear answers for every pension management question that arises.
Even where the most comprehensive legal and regulatory framework exists and answers are crystal-clear, your pension is at risk because enforcement or policing of the law is lacking. I have taught U.S. Department of Labor pension investigators. As trained and committed as they are, they’re hopelessly out-gunned by the investment industry. Wall Street runs circles around regulators charged with enforcing pension laws.
However, the vast majority of pensions are not subject to any comprehensive law.
For example, as hard as it is to believe, explain or justify, the approximately $5 trillion in America’s government pensions is not protected by any comprehensive federal or state law.
The Employee Retirement Income Security Act of 1974 (ERISA), the federal law that establishes minimum standards for pension plans in private industry, does not apply to public pensions.
ERISA was enacted to protect the interests of employee benefit plan participants and their beneficiaries by requiring the disclosure of financial and other information concerning the plan to beneficiaries; establishing standards of conduct for plan fiduciaries; and providing for appropriate remedies and access to the federal courts.
Since ERISA doesn’t apply, none of the above mentioned protections exist with respect to America’s state and local government pensions.
Further, both investment managers hired to manage public pension assets and public pensions themselves often get confused as to what legal standards apply.
For example, my 2015 forensic investigation of the Jacksonville Police and Fire Pension Fund revealed that while the city pension was not subject to federal (ERISA) pension law, since it had voluntarily adopted the highest ERISA legal standards and then failed to enforce those standards, violators could be subject to personal liability for any ERISA fiduciary breaches. In short, this non-ERISA government pension voluntarily became ERISA governed, much to the confusion of all involved.
So, if ERISA does not cover state and local pensions in America, what law does?
There is no comprehensive law. Public pensions are regulated by a thin patchwork quilt of state and local laws. Many of the most significant issues related to managing state and local pensions are unanswered in these statutes. Anything that’s not clearly illegal under applicable law can probably be gotten away with.
For example, another investigation of a government pension I undertook revealed that while local law prohibited the pension from investing in hedge funds, the pension had secured a twisted legal opinion from a local firm that an investment in a trust that, in turn, invested exclusively in hedge funds was permissible.
An investment in a fund that invested exclusively in hedge funds was not an investment in a hedge fund—got that?
The pension overseers were obviously hell-bent upon gambling in hedge funds. Some Wall Street huckster had sold them on a complex hedge fund investment they neither understood nor would have selected on their own. The overseers weren’t about to let the law get in their way. They didn’t outright break the law—they just bent it in their direction.
Another problem with state and local government pensions in the United States is that no federal or state regulator, or law enforcement agency, is monitoring or policing these plans. Crooks need not worry about the feds—the DOL or FBI—coming after them and even state Attorneys General are reluctant to get involved in public pension matters due to political concerns.
For example, in both Rhode Island and North Carolina my forensic investigations exposed billions in state pension looting amounting to the largest financial crimes in the histories of these states. My clients and I referred these findings to both the FBI and state Attorneys General.
In Rhode Island, then-Attorney General Kilmartin responded that his office had “limited investigatory authority” and “did not investigate issues involving the solvency of the pension fund.” Imagine that—the state’s top cop who claimed on his website to “fight to enhance the economic security of Rhode Island and restore the public trust in state government by fighting corruption”—lacked the authority to delve into a multi-billion dollar heist.
“If you have general questions regarding the fund’s solvency, contact the pension,” said Kilmartin. “If your complaint concerns an allegation of criminal misconduct, you should contact the Rhode Island State Police or your local police department.”
Local police department to investigate multi-billion dollar complex financial crimes?
With all due respect, Kilmartin’s office didn’t have anything more important to do than investigate allegations of wrongdoing related to the largest pot of money in Rhode Island—billions in the underfunded pension that thousands of state workers depend upon for their retirement security. His successor, Attorney General Peter Neronha, has also failed to take any action, as looting of the state pension continues through today. The billions in rich fees the Rhode Island pension has paid to Wall Street will ensure that workers’ COLA benefits are never reinstated.
In closing, to protect your retirement security you need to have some knowledge of the law that governs your pension—strengths and weaknesses. While American pension laws are often regarded as the most comprehensive, as we have seen there are significant loopholes—such as federal ERISA law not covering public pensions—and monitoring and enforcement by regulators and law enforcement is hardly foolproof.
Many foreign countries lack the regulatory and financial capacity to thoroughly ensure the integrity and solvency of foreign pensions.
However, if pensioners globally take an active role in scrutinizing their pensions, asking probing questions through public records requests, identifying irregularities, funding investigations through “crowdfunding,” and sharing all they have uncovered with regulators and law enforcement, regulators and law enforcement will be forced to become more familiar with pension matters—whether they like it or not.
It’s up to state workers to make public pension protection a priority.
Edward Siedle has been called “the Sam Spade of Money Management,” “the Financial Watchdog,” “the Pension Detective” and “the Equalizer” for his work pioneering over $1 trillion in forensic investigations of the money management industry.
The founder of Benchmark Financial Services, he is a former SEC attorney who, in 2017, he secured the largest SEC whistleblower award in history ($48 million) and in 2018, the largest CFTC award in history ($30 million). He is the co-author of the bestseller, Who Stole My Pension? (with Robert Kiyosaki, author of Rich Dad, Poor Dad) and the author of How To Steal a Lot of Money–Legally. He is an active member of the Florida Bar.
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