The Wall Street Journal has been reporting recently on a problem with the pension plan of a Brooklyn food coop.
The story, in brief, is this:
The coop’s pension fund for around 90 salaried employees has been managed by a coop trustee who is, or has been, employed on Wall Street. The “strategy” was to keep a large cash balance and invest rest of the pension money in eight individual stocks, mostly early-stage biotech firms, one of which the Journal says the manager is also the largest shareholder of.
This is crazy.
The inappropriateness of a highly concentrated strategy and of management by someone other than a third-party expert surfaced last June. Over the prior 12 months, the S&P 500 had been up slightly. The coop was down by 20%, and the $4.8 million fund was underfunded by 40%. As luck would have it, one of the fund’s holdings hit it big during the second half, eliminating the underfunding and allowing the fund to adopt a more conventional strategy without a lot of financial pain.
Although the story notes that Wall Streeters had their fingers in the pension pie, there’s no mention that any of the parties had experience or training in portfolio management in general or the management of pension funds in particular. My guess is that’s because none of them did. They figured that because they had, or once had, business cards from a financial firm, that was all they needed.
My experience is that with small employers like this coop this sort of thing happens all the time. One exception, though: the part about one holding doubling in price, bailing out the whole ill thought out enterprise, usually doesn’t happen. The ending is typically much uglier.