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Do SF Employees Receive Equal Protection?

Our society relies on trust. We put our faith in restaurants to serve us the freshest food, we rely on our neighbors to watch our homes, and we trust our lives to traffic controllers and pilots when we are 30,000 feet in the air. Yet, when it comes to financial advice, too frequently financial advisors put their commissions before the interests of their clients. To address this conflict, the Department of Labor has a proposal before Congress that requires financial advisors to “act in the best interest of their clients.” Yet, while our federal government moves to increase investor protections, the San Francisco Retirement System (SFERS) has failed to keep pace with this trend.

… there is great consistency here between this deferred comp insurance product, and the Retirement System’s desire for hedge funds in the taxpayer funded pension: seek the most fee-laden, opaque investment, in an environment with the least government oversight.”

San Francisco public employees are covered by a traditional public pension that is funded by taxpayer and employee contributions. Employees also have access to an optional, 401k-type account that is commonly referred to as “deferred comp.” The money that goes into deferred comp comes 100% from the sweat equity of the employees. Unfortunately, through a quirk in the tax law, deferred comp receives no protections from the Department of Labor and the proposed fiduciary law.

SFERS has used a small Santa Monica investment consultant as traffic controllers to both the $20 billion pension and the $2 billion deferred comp plan. Per the firm’s SEC filing, none of its other clients have been directed to the same investment runway to which SF employees have been steered. That is just one of the many issues that should raise concerns amongst San Francisco employees on whether anyone has assumed a fiduciary responsibility over their deferred comp account.

1) Per a Retirement Board member and the Santa Monica firm’s SEC filing, the consultants have only one public pension plan as a client- San Francisco,

2) The Santa Monica consultants have chosen to direct participants to mutual funds packaged in a life insurance product. This maneuver obviates the SEC with the weaker Department of Insurance. It is like putting a few car parts in an airplane and claiming your jurisdiction should be moved from the FAA to the California DMV- an agency with lighter regulation standards,

3) Is a consultant qualified to recommend insurance if they do not possess an insurance license?

4) As disclosed at a public meeting, not one city employee has ever received a death benefit from this life insurance over the past 30 years,

5) Unlike mutual funds, these life insurance contracts do not allow the purchaser to receive a volume discount for the size of their account,

6) Over the past 30 years, deferred comp has been churned from Hartford Insurance -to Aetna Insurance -to ING Insurance -to Great West Insurance -to Prudential Insurance. If a retail financial advisor switched insurance carriers every time a client’s contract terms matured, they would lose their license.

7) The SEC website warns against using these life insurance policies inside a pension plan (Google: “SEC Variable Annuities”),

8) For the deferred comp plan, the Santa Monica consultants selected a money-market type fund, called a “stable value fund” that lost $100 million during the financial crisis. The fund lost money not from market fluctuation, but from investing in exotic, risky investments that became totally worthless,

9) As exposed in the Financial Times of London’s blog (12/16/14), the husband of one of the partners at the consulting firm accepted numerous bundled political campaign contributions from financial institutions right around the time those financial institutions’ products went into the SF pension. Subsequently, the Santa Monica firm’s contract was not renewed for the $20 billion pension. However, they still manage the SF deferred comp plan.

10) As discussed in the San Francisco Chronicle (11/29/99), there has been a history of lobbyists getting paid to influence which financial institution earned the deferred comp account. If our consultants and Retirement System are making recommendations purely in the best interests for the public employees’ benefit, why are lobbyists in the background?

SFERS had two almost identical, boilerplate contracts drawn with the Santa Monica firm, identical down to San Francisco’s condition that the firm avoids using tropical hardwood. But, despite the specificity of flooring, in item #5 on page two of each contract, the wording radically diverges. For the taxpayer/employee funded $20 billion pension, the consultant agreed to offer a “fiduciary relationship.” But for the employees’ deferred comp plan, “fiduciary” was replaced with the concession to only: “act in good faith and in a professional matter.” This difference in wording hardly seems inadvertent and goes against the entire federal trend of enhanced consumer protection. Hardwood floors seem to matter more than the fiduciary protection of employee assets.

For San Francisco deferred comp participants, first the tax laws did not include them under Department of Labor protection; then the Santa Monica consultants eliminated SEC oversight; and finally, on a $2 billion account, the city failed to negotiate for a “fiduciary standard.” It is similar to a pilot navigating through a blinding fog, radioing the tower his instruments aren’t working, and curiously, the traffic controllers directing the plane to the one runway blacked out by an electricity failure. This is the reason Forbes Magazine (2/14/13) described government deferred comp plans as the “investment backwater- the Wild West of retirement planning.”

As it stands now, a San Francisco public employee can walk up to a random financial storefront and receive a better federally-imposed standard of care than they would receive by investing with the full strength of the City and County of San Francisco. But there is great consistency here between this deferred comp insurance product, and the Retirement System’s desire for hedge funds in the taxpayer-funded pension: seek the most fee-laden, opaque investment, in an environment with the least government oversight.

If you are still confused about these deferred comp issues, email me:

Lou Barberini is a San Francisco CPA living in West Portal

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