Retirement insights from a Colorado PERA perspective

Inside Colorado PERA

Investment Stewardship: Protecting Assets by Watching Costs

investment stewardship

Earlier this summer, Colorado PERA
released its 2019 Investment stewardship Report, which demonstrates how PERA’s investment program pursues the
plan’s long-term financial sustainability.

PERA’s approach to sound investment
stewardship includes protecting members’ assets through cost-conscious
investment management. This, in turn, protects the long-term value of the PERA
portfolio, benefitting members and retirees. Knowing that many PERA members
will retire decades, even a generation into the future, PERA adheres to a
financial stewardship approach that limits costs today, preserving the value of
its assets for years into the future.

Investing sustainably for the
long-term:
PERA’s investment portfolio must meet
the perpetual needs of its membership. With this long-term investment horizon,
the portfolio must be sustainable, requiring a broad and diverse range of
assets in different classes, markets, and sectors. And PERA must navigate excess
volatility created in the markets by investors who react to short-term signals.
One way to achieve this is by seeking companies with strategies built for
longevity. These are high quality firms that adapt their business models to
meet the expectations of stakeholders, including investors. In the long run,
this focus is intended to boost PERA’s investment performance and contribute to
its sustainability.

Managing assets internally: PERA staff manage more than 60 percent of total fund assets
internally, at a cost of less than 0.06 percent of those assets. Managing public equity and public fixed
income investments in-house saves an estimated $45 million per year over the
expected cost of outsourcing to other investment managers. PERA also selectively
partners with external experts who add value and help PERA to earn better
risk-adjusted returns at lower overall costs. Whenever possible, PERA
negotiates with those external partners for lower management fees as well.

Unbundling equity research and
transaction costs
: As an
institutional investor, PERA is also concerned with research and transaction
costs, which have implications for large and small investors alike. As
discussed in previous PERA on the Issues posts, staff have
repeatedly called for increased pricing transparency through clear guidance
that would allow U.S. investors to pay directly for research, rather than
receiving research as part of a bundle of services paid for by equity trading
commissions. This is one part of PERA’s ongoing advocacy for fair markets and
fair costs.

Lowering 401(k), 457, and Defined Contribution
plan fees:
For members who choose to participate in PERA’s 401(k) plan, the all-in costs have dropped by 68 percent
since 2011. This includes a reduction of the administration fees from 0.50
percent of assets in 1995 to 0.03 percent of assets in 2018, which also extends
to PERA’s 457 and Defined Contribution plans. These lower investment costs should
encourage PERA members to participate by allowing them
to retain more of their retirement savings, while increasing efficient plan
management.

Protecting members’ assets by watching
costs is a critical component of PERA’s investment stewardship philosophy. More
on PERA’s four-part stewardship approach is available here.

StewardshipThe practice of overseeing or managing something entrusted to one’s care. PERA’s approach to investment stewardship is focused on ensuring the financial sustainability of the fund that pays benefits to retirees and beneficiaries.StewardshipThe practice of overseeing or managing something entrusted to one’s care. PERA’s approach to investment stewardship is focused on ensuring the financial sustainability of the fund that pays benefits to retirees and beneficiaries.StewardshipThe practice of overseeing or managing something entrusted to one’s care. PERA’s approach to investment stewardship is focused on ensuring the financial sustainability of the fund that pays benefits to retirees and beneficiaries.Defined contributionA type of individual retirement plan in which an employee saves a portion of each paycheck (along with a potential employer match) and invests that money. The employee’s retirement benefit is based on their account balance at retirement. A 401(k) is a type of defined contribution plan.VolatilityA state of unpredictable activity in financial markets, during which prices can experience significant and/or unexpected swings in either direction. Public equityA type of investment in which investors purchase shares of a company that is traded on a public stock exchange.

Comments

  1. Elisabeth Shippey says:

    It would no doubt be more beneficial to the long term and short term quality of the portfolio to cut staff and hire a reputable firm to manage the investments. I am surprised, with all the negative attention PERA has had over the past many years, that this has not been a requirement. I am a PERA retiree, tired of getting zero to meaningless increases and , with inflation, going significantly backward in my life style. But I’m also concerned for all the middle aged employees who keep going backward in after tax income because of poor decisions by the expense saving internal investment decisions.

  2. Allen Feldman says:

    Thank you for all that the team does to maintain my retirement as an educator in Co.!

  3. Barry Thorpe says:

    I’d certainly enjoy hearing the working definition of ‘sustainability’…….. Since retiring, beginning in 2010 PERA’s benefit has been drastically un-sustained. Reduction, then complete loss of any annual increase reflecting increased cost of living can hardly be called
    “sustaining”. PERA and the Colorado Legislature simply have no credibility since breaching ABI provisions for fully vested retirees.
    To “sustain” benefits, can’t possibly mean to systematically default on deferred compensation, breach of contract, and reduction in benefits retro-actively from retirees AFTER retirement decisions were made.

  4. PatrickN says:

    Thanks to the PERA team for evaluating the sustainability of the plan. As a pre-retirement member who must now increase my contributions due to the recent changes I will express my appreciation for a measured and appropriate response making future benefits possible. I also appreciate the lowering of investment management fees as this makes it easier to build a future benefit from 401/457 plans to supplement the very moderate reduction in benefits. Even though some of this makes life difficult in the short-term, I get that there are no guarantees in life and that an expectation of an eternally growing disproportionate benefit is not realistic and I also get that the taxpayers of Colorado didn’t sign a contract with beneficiaries. Making the program financially sustainable is the only way to make it a non-fantasy option for beneficiaries.
    Once again, to the PERA staff, thanks for being wise stewards of a valuable program to so many people.

    • Barry Thorpe says:

      I’m afraid I must take issue with a couple statements in your glowing praise of PERA stewardship above.

      “There are no guarantees in life”
      That’s precisely why contracts are instituted, and both parties need to be bound by the legal agreements made. I have registered this complaint before, of course. PERA rescinded a benefit from those who already upheld their end of the contract, and met the conditions in place. If PERA needed to make adjustments for having either mismanaged my career contributions, or suffered a downturn in the market, as a fiduciary duty, any changes needed to bolster the system should NOT have been imposed on those already retired. There is one particular guarantee in life…..that the time to collect pension is limited for all of us by our own mortality. The pool of retirees who lost annual benefit increases, ( began in 2010) gets smaller every single day, yet still those who remain bear a larger and larger share of the burden. You may not understand this until you too are retired, and think twice before you do, because you’re on record here as supporting the post-retirement breach of the conditions under which you planned for your senior years. PERA has rendered the term “fully vested” meaningless.

      “The taxpayers of Colorado didn’t sign a contract with beneficiaries”
      This is a representative government. The legislature (and the organization that co-opted a portion of my salary every month for 30 years) certainly did have contract with the public servants they hired to do the job of educating the children of Colorado. The retirement contribution was mandatory, and there was a reasonable expectation that benefits would be paid as contracted. The beneficiaries of educator services ARE the people of Colorado, whose children are taught, homes are protected, laws enforced, fires extinguished, etc. The very concept of pension acts as a suppressant on public employee wage demands, and is a really good bargain for taxpayers. It wouldn’t hurt if the fund needed an occasional boost in revenue to keep up with the market.

    • Mich says:

      “Even though some of this makes life difficult in the short term”.
      That might be true for you as a pre-retiree because you can still look forward to annual increases and the possibility of promotions but for current retiree’s these losses will compound over time. Our losses will end up being quite significant and that is what PERA is so disingenuously banking on. Did you get a pay raise this year? I didn’t.
      Will you send me a thank you card when I loose my house in ten years?

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