It’s an open question whether “placement agents” serve as lifesavers to agencies seeking new investment solutions for underfunded pension programs or parasites preying on corruption-prone governments. Christopher Tobe, a trustee who called attention to the payment of millions to investment middlemen for the Kentucky Retirement Systems, was recently replaced on the KRS board. His lawyer, Edward Siedle, complains that state and internal audits of the systems’ relationship with placement agents were inadequate. The U.S. Securities and Exchange Commission has begun delving into the issue.
Aside from the cost – placement agents used by KRS collected $8.7 million in fees between 2004 and 2009 – this mode of investment counseling causes concern because in other states it has been implicated in “pay-to-play” schemes which found politicians extorting kickbacks from agents who got business. Former state Auditor Crit Luallen uncovered no evidence of such hanky-panky in Kentucky but raised questions last year about the close relationship between a former KRS chief investment officer and one placement agent. While saying there was no indication the official received any tangible benefit, she deferred to SEC for further investigation.
Since then, the 2012 General Assembly has passed legislation that’s supposed to put tighter controls on placement agents, including required reviews by the state auditor every five years, registration of agents as lobbyists and term limits for trustees of public pension systems.
However, Tobe told State Journal reporter Kevin Wheatley the bill actually legitimizes unlimited payments to registered placement agents. Rep. Mike Cherry, a Princeton Democrat who sponsored the legislation, said he wants the agents regulated but does not want to ban them outright if they can provide useful assistance to a retirement board that faces a $19 billion unfunded liability.
Public and private pension programs share a common quandary with individuals outside of public service who increasingly have to save and plan for their own retirement security through 401(k) plans. It takes money to make money in the stock market, and most need expert guidance through the financial minefield. Good advice doesn’t come cheap, and investors also have to beware exorbitant management fees that can undercut whatever gains they achieve when the markets go up.
You’d think KRS trustees would be more knowledgeable than the average duffer, but Tobe questioned whether the present board is up to the challenge. He charged Gov. Steve Beshear failed to comply with a state law that requires two of three gubernatorial appointees to be investment experts – having at least 10 years in the field. None of the current ones meet that standard, in his opinion. Kerri Richardson, spokeswoman for the governor’s office, maintained Tobe’s replacement and other board members fulfill the statutory requirements.
Let’s find out who’s right. Most of us probably hadn’t the foggiest idea what placement agents were or what they did to earn the big bucks before their arcane transactions made headlines, but 340,000 active and retired public employees across Kentucky depend on KRS board members to understand the nuances and to have the good judgment to know whether agents’ services are worth the price. A retirement program that’s billions of dollars in the hole can’t bank on blind luck to climb out. It’s bad enough that state government has underfunded the systems for years. The last thing KRS needs is unreliable investment advice.