Monthly Archives: May 2013

State Pension Reform Should Look to the Federal Thrift Savings Plan Model


Many states are currently facing unfunded liabilities to their defined benefit pension programs.  Pennsylvania, in particular is over $40 billion short of its obligations, alone about 1.5 times its entire yearly budget.  Borrowing a concept from the private sector, and favored by Governor Corbett, is a plan to move all new state employees into a defined contribution 401k type program.  While the move to defined contribution makes very good sense, it is important to recognize the problems with this approach and avoid them, doing the best we can for our state employees.

Defined contribution is subject to failure on two fronts.  First are high costs that limit investment returns.  Many plans offer overly expensive investment choices that, because of the high costs, often in the short term and pervasively in the long term, do not match the returns of simple passively managed low cost index funds.  Then to make matters worse, responsibility to select the right mix of investment choices is dumped into the laps of ordinary workers (and some very smart workers also) who know little to nothing about the principles of sound investing, thus becoming their own worst enemy by allowing their emotions to make decisions that put them on a path to very poor results.  The good news is that it doesn’t have to be this way and there is a superior model that all can strive to achieve.

The most surprising thing about this defined-contribution-done-right example is the source, that being the Federal Government, of all places!  It’s indeed uncanny and hard to admit the Federal Government doing anything better than the private sector but the Thrift Savings Plan does just that.  The TSP is administered by the Federal Retirement Thrift Investment Board, an independent agency of the Federal Government established in 1986.  It now has over 4.5 million participants with $374billion in assets at the end of 2012.

What sets the TSP apart from most plans offered in the private sector is its strict adherence to low cost and simplicity.  It currently offers only five investment choices plus target date collections of the five funds designed to produce the highest returns for the least amount of risk appropriate.  The target date funds were added in August 2005 to address unprepared employees choosing poor fund mixes and then trading them on emotion to their detriment.  The target date mixes are determined by scientific methods looking at past volatility and returns of the individual asset classes as well as how they tend to move relative to each other, combined with the participant’s individual time horizon.

While private sector 401k plans are dominated by actively managed funds that purport to be run by managers clever enough to beat the market, all TSP funds are passively managed index funds that won’t beat the market but guarantee capturing the generous returns the markets make available over time less very small expenses to do so.  The dirty little secret is that attempts to beat the market most often end up trailing the market, mainly due to the expenses incurred in the pursuit.  Study after study confirms this as presented in the writings of such investment heavyweights as John Bogle, founder of Pennsylvania based Vanguard Funds, who in a 2006 interview for Frontline noted:

“So our legislators and our federal employees get these great benefits through as close to a perfect retirement plan as you can have ……  We don’t do that for our regular citizenry.”

Attempts to require private sector 401k plans to offer even one low cost index fund has been a struggle.  The TSP, using only index funds, offers coverage of five distinct asset classes for an expense drain to the worker that is the lowest anywhereExpenses compound in the negative as returns compound in the positive and can alone result in huge differences in account balances at retirement time.  The actual numbers will seem untrue but they’re not.  While many private 401k plans impose reported expenses to the investor in excess of 1%, or 100 basis points, the TSP reported 2012 expenses across all funds of an amazing 0.027% or 2.7 basis points!  The actively traded fund manager hoping to beat the market must make up this difference just to break even because the expense of trying is passed through.  In addition to reported expenses are those that are hidden but real nonetheless.  A good article at Nerd Wallet lists 28 known potential hidden fees and shows by example how differences in expenses will drastically affect outcomes at retirement.

So when states look at defined contribution there are important choices within that choice that deserve attention.  One approach that should certainly be considered and has yet to be attempted to my knowledge would be for a state to petition the Federal Government for voluntary participation and inclusion of its  employees within the Thrift Savings Plan.  So long as the TSP could accommodate unique matching and vesting criteria for each state’s employees, this expansion of the TSP into state governments should only benefit both states and their workers.  In addition, a smoothly running structure that has been developed over time would save the expense to reinvent it.

In March I proposed this concept to one of the best investment advisors I know on his Saturday radio show, Financial Freedom, on WHP 580 in Harrisburg.  Mr Tim Decker, host of the show, was fully supportive of the idea and the various legislative committees now considering pension reform would do well to seek input from Mr Decker.  Our radio conversation can be heard here.  Jump to 14:00.

Just yesterday morning on CNBC’s Squawk Box, Larry Fink, CEO of BlackRock, the largest investment management firm in the world, appeared with Congressman Paul Ryan.  Both were singing the praises of the Federal Thrift Savings Plan, presenting it as the best model for individual retirement accounts.  Significantly this is exactly what George W Bush suggested as the basis for voluntary private Social Security accounts.  Will Pennsylvania and other states make the TSP their model for state employee pension reform?

Note: This story was shared to WatchdogWire-Pennsylvania

How the US Postal Service Could Possibly Save Itself

Just last week the United States Postal Service announced another $1.9 billion loss in just one quarter, with the warning that without substantial changes the losses would continue to mount.  Something has to give.

Retired from the Postal Service, I have some ideas on what needs to be done to save this Constitutionally provided institution, and a new line of clothing, mentioned several months ago, does not even make my list, nor do I think elimination of Saturday delivery alone would be sufficient.   During my career I carried mail, worked inside a large postal plant, and collected data for a year.

It was that year of collecting data that foretold today’s inevitable crisis.  The year was 2000, and at that time as I remember, first class mail was less than half the letter mail volume but more than half total postal revenue.  The problem was that, of that first class mail, somewhere around 70% consisted of bill presentment and payment.  The writing was on the wall.  Much less bill presentment, bill payment volume has evaporated to the internet and will continue even more.  This was one major straw that broke the back of a camel already straining under what the postal service failed to recognize early on, that the business was becoming about the delivery of things rather than information.  Other substantial problems contributed to the current situation, but the loss of quality volume sufficient to sustain delivery to every delivery point six days a week was an inevitable result of new information technology and beyond the post office’s control.  Simply cutting the workforce and utilizing a heavy application of sorting automation, in many ways commendable, could not keep up with the deteriorating situation.

Political considerations put cutting several known sources of waste beyond reach that could have delayed, but only delayed, the current crisis.  One example, but certainly not isolated, happened near where I live.  Two small towns that appear as one are separated only by a railroad track.  Each had its own post office with its own postmaster and staff, and unfortunately still does.  One town outgrew its office.  Since the two towns together are smaller than many single towns, the opportunity was perfect to build one new office large enough to accommodate both.  I’m not sure if this was even suggested, but am confident, if tried, the local congressman would have been besieged with calls from one of these adjacent towns about losing its identity or the hardship of having to travel perhaps a half mile further to reach the new combined office.

Another common well-known waste that politics preserves occurs in suburban neighborhoods that originally had mail delivered to a box attached to the house or through a slot in the front door, rather than a box at the curb.  In such situations the carrier drives to the area, parks and walks to each house, then moves the vehicle to the next area, over and over.  Yet by all appearance such neighborhoods are identical to others where curbside boxes were required from the start, and delivery from the vehicle is several times more efficient.  Private businesses looking at the current postal challenges would quickly change this, but under the political connection no one dares to even try.

Unions are another obstacle to efficient operation in ways other than wages that exceed the skill level.  Removal for poor performance or abuse of leave is extremely  difficult.  The workplace is fractured into crafts, each represented by its own union, so employees of one craft may not touch the equally low skilled work of another.  At one time this could work, simply not today.  One would think when workers at some plants, willing to work many hours of available overtime, can earn in excess of six figures, there would be concessions to overall efficiency and responsibility to secure the remaining jobs of all.

That brings us to today with the postal service looking to cut Saturday delivery to keep itself afloat.  This is attempting to put a band-aid on a gaping wound, and will be difficult to manage as well, as every Monday will follow two non delivery days and will be like the current volume anomaly of Tuesdays after Monday holidays.  Of course there will still be Monday holidays and those Tuesdays will now be after three consecutive non delivery days, what I can only imagine as a volume-overload management nightmare.

With that we get to the only possible solution I can conceive, the immediate move to three-day M-W-F delivery.  While each delivery day volume would increase, it would be more manageable by being more consistent day-to-day.  Such a move would mean adding carriers as some routes would have to be cut slightly (but not nearly by half) to get the job done.  Savings would be attained by cutting the use of delivery vehicles substantially.  The other significant savings would require a major change of workplace rules where carriers not delivering express mail and priority parcels on Tu-Th-Sa would be working in plant preparing mail for delivery, replacing work being done by clerks and mail handlers now, eliminating many of those positions.  Consideration would have to be made to occasionally deliver on Tu-Th-Sa in working around holidays.

Proposed plans are to continue delivering parcels six days a week and I would assume express mail also.  Most offices could do this job with one of every three or four current carriers, leaving the others to work in plant.  Limiting six-day parcel delivery to priority rate parcels would encourage greater use of the higher priority rate.  For letters considered urgent there already is a flat rate express letter option that does not require a time-consuming signature.  Out of the box thinking and a willingness to be flexible with current workplace rules and a decidedly more radical approach is necessary to potentially continue the US Postal Service as a self-sustaining entity in the twenty-first century.

Note: This post shared to WatchdogWire-Pennsylvania