It isn’t just evil Wall Street bankers who commit financial fraud. Recent news out of Kansas City serves as a reminder that unions can be just as prone to financial shenanigans as major corporations. The Kansas City Star reports that multiple federal agencies, including the Department of Labor, have initiated an investigation into gross mismanagement of pension funds run by the International Brotherhood of Boilermakers.The details are still rather sketchy, but the general outline is plenty incriminating: investment managers were hired based on family relationships with trustees, employees fired for cooperating with federal investigators and losses of over $1 billion.Some parts are particularly juicy:
According to the lawsuit, the pension fund lost more than $1 billion in investments because of worsening financial markets in the summer and fall of 2008. Boilermakers International President Newton B. Jones told Barnhill and others that Jones’ re-election could be at risk because possible cuts in pension benefits may be needed, the lawsuit alleged.Jones is not a trustee of the funds, but the union’s trustees serve at his pleasure. . . .In October 2008, the lawsuit alleged, Barnhill told pension fund trustees that Jones’ plan “appeared to be financially and legally unsound,” violated policies and involved a broker “of questionable background.”In another allegation, the lawsuit claims that George Rogers, then a union vice president, appeared to steer between $500 million and $1 billion worth of contracts to his daughter’s company. At the time, Rogers was a trustee on all three employee benefit plans.
The administrators and trustees of both public and private sector pension plans bear a heavy responsibility: managing the investments on which tens of millions of people will depend in old age.Unfortunately there is a systemic moral hazard here. Very often, the trustees of pension programs are appointed by or have political relationships with political and/or union leaders. They are under great pressure to cover up any future shortfalls in pension plans — and, when investments fall short, their political and union masters encourage them to take wild risks and riverboat gambles to juice up their returns.Look for more problems like this to emerge; by and large American union and government pension plans have overpromised and underinvested and as the Boomers retire the weak underpinnings of these pension funds will cause increasing problems.For readers, the lesson is clear: your retirement planning is a stool that needs three legs. There is Social Security, which despite its problems is likely to remain, though perhaps with diminished benefits and a later retirement date. There is your company pension or (better, in our view) 401(k) plan. And there are your personal savings and investments.Beyond these three, find work that you love and plan to do it as long as you can. Alternatively, think of retiring from your career job and transitioning to another type of work — perhaps part time, perhaps full time — that may pay less but that you find fulfilling. This kind of work can enrich your retirement both by supplementing your savings and by keeping you connected to the wider world through work that you enjoy.But don’t trust the pin-striped professionals who run company, union and government pension funds. Most are both honest and competent, but too often, they answer to other masters who don’t have your best interests at heart.