By: Martin Armstrong
I have been warning for some time that government was eyeing up pensions. The amount in private pension funds is up to 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. 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, as the founding fathers intended, 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. While this may sound good on the surface, like all Orwellian plans, it comes just in time for the next step: 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 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 now back up his decision with proof. This may also have the impact of foreclosing new fund managers from entering the business since they will lack 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 must 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 and 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.
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. 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”.