Op-Ed

Pension system doesn't need middlemen

At issue | Aug. 27 Herald-Leader article, "Beshear seeks audit of practices, Wants another review of $13 million paid in investment fees to middlemen"

The Kentucky Retirement Systems (KRS) needs placement agents like a dog needs ticks.

The $13 million, now approaching $15 million and growing, in hidden commissions were kept secret from the full board until only a few weeks ago. KRS pays professional staff and consultants nearly $1 million a year so we do not have to pay placement agents.

A leading public pension expert, Girard Miller, wrote in his monthly public finance column in Governing Magazine an article titled "Who Needs Placement Agents, Anyway?" There really is no place in the pension boardroom for mercenaries.

He makes my points that larger state plans like KRS have national independent consultants and professional staff to find the best managers. Meanwhile, the large pension plans retain professional consultants to help them screen vendors.

So why on earth is it necessary for legitimate and competent investment advisors to a pension fund to hire a mercenary?

Having sat on both sides of the table at final presentations for 25 years, I can tell you there is really no value added to the analytical process from marketeers that cannot be delivered by the key players I have identified above.

But I find his best guidance is that his article infers that any commission paid for in excess of $199,000 per investment at a large fund like California's pension system amounts to some sort of kickback.

That could apply to 16 of the 18 KRS placements.

New Jersey pension chairman and presidential adviser Orin Kramer told Bloomberg News. "When you look at some of who the placement agents are, you say these are people who are really not in the financial business, these are politically connected intermediaries, and that's not a way it ought to operate."

In a speech to Texas Public Plans last fall, former Securities and Exchange Commission attorney Edward Siedle stated: "The hunt for criminal activity involving public pensions has just begun. The investigations of placement fees have just begun. Placement fees are commonplace and can be found in every state. Think of it this way: Public funds are the next Madoff."

KRS staff and selected trustees have known about placement agents for years; the full board and the public have only known for a few weeks.

While KRS staff clings to the fact that the SEC was lobbied off its proposal to make placement agents illegal outright for the time being, engaging in "barely legal" practice is not the standard I think we should strive for.

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