CALL held its first business meeting of the 2016-2017 year at Nacional 27, 325 West Huron Street, on September 15, 2016. There were 81 registered attendees. President Todd Ito called the meeting to order at noon and welcomed new CALL members:
- Tom Duggan (Thomson Reuters)
- Elaine Knecht (Barclay Damon, LLP)
- Jennifer Koertge (Brinks Gilson & Lione)
- Martin Korn (Sheppard, Mullin, Richter & Hampton LLP)
- Ariana Lim (Professionals Library Service)
- David Sanborne (Cook County Law Library)
AALL past-president Keith Ann Stiverson thanked everyone for the best Annual Meeting ever! Through luck and her efforts, she hopes to bring the meeting back to Chicago sooner than later!
Wild Apricot/Membership Update
Todd issued a reminder about membership renewals. All members should have received an invoice by email by this time. Please contact Todd if you think there are any errors in the renewal form or if you have not yet received your renewal form.
Public Relations Committee Members Needed
Todd asked for volunteers for any of the CALL committees, but the Public Relations committee is in particular need of additional members. The PR committee has a number of responsibilities that are divided among the committee members–taking pictures at CALL events, Tweeting, posting other social media sites about events or upcoming events, finding other ways to attract new members to CALL, and also work on the CALL website. Please get in touch with Todd or Joanne Kiley, PR committee chair if you are interested in joining the committee.
Vice president Clare Willis introduced and thanked the business meeting sponsor–S&P Global Market Intelligence, represented by Kevin Morrissey and Lindsey Cantazaro. Mr. Morrissey thanked the current clients in the room (a majority of the attendees). Since 2004, CapIQ has been working with law firms. They understand that budgets are tight but that the information they provide is hard to find. Speed is a priority, and CapIQ provides a means of collaborating with practice leaders, business development, and finding conflicts.
Meeting Speaker: William Birdthistle, Professor of Law at Chicago-Kent College of Law
Clare introduced Professor Birdthistle. He is currently a professor at Chicago-Kent College of Law, where he teaches on topics such as business organizations, securities regulation, corporate finance, investment funds, and international business transactions. Prior to Chicago-Kent he was an associate in the Boston office of Ropes & Gray, focusing his practice on mutual funds and hedge funds, specifically on governmental investigations into allegations of malfeasance in the mutual fund industry. In 2016, his book on 401(k)s, Empire of the Fund: The Way We Save Now, received critical acclaim from the academic world and by publications such as the New York Times, The Economist, Time, Money, and The Washington Post.
Professor Birdthistle began by expressing his excitement to be talking with a group of bona fide book lovers–the highlight of his speaking tour! He then spoke briefly about the cover of his book (copies of the cover were provided at all tables). One of his children mistakenly thought that the shield was a Caldecott award and that he had won. To which he replied, “why yes I did.”
He then moved on to his main topic, saving for retirement in America. There have been recent stories in the news of lawyers suing their law firms over their retirement plans. The topic of pensions has also been prominently featured due to the pension debt and obligations of Illinois state and local governments. Those with private pensions are a rarity today.
Social Security and employer retirement plans (previously more commonly operated as pensions) are the two biggest components of how we accumulate wealth for retirement. But the Social Security system is in jeopardy from politics and is not keeping pace with costs such as cost of living and healthcare cost increases.
The pension component is virtually extinct–especially for those working in the private sector. Only 3% of private sector employees have pensions. If you have a public pension, it’s questionable whether that money will be available when you retire, so we must handicap for the likelihood of both Social Security and pensions being at risk.
401(k) plans change the equation for employers. These are different than defined benefit plans, as companies are generally not fond of fixed commitments as it is hard to predict the future finances of the company.
But his book hypothesizes that the 401(k) experiment is not going to be successful. Over the course of the next 20-30 years, Americans will manage 16 trillion dollars of assets, but only 90 million Americans will do it well.
So, why is he so pessimistic? To start, the system’s success is predicated on us–everyday people. How we can understand how much we’ll need for our retirement and how to manage the money? These are difficult tasks with many unpredictable factors such as the volatile marketplace. It’s not a question of sophistication or what you know. It’s the structure of the system. Even if a group makes the same decisions, they’ll get different results because not everything is priced the same. Operating as an individual is always going to be more expensive–as opposed to group plans (think of bargain prices at wholesale clubs).
For example, investing in annuities is a gamble. You give $100,000, and they promise you a specific payout per month or year. They hope you die early, you hope you live long. This is basically an expensive pension.
The second reason for his pessimism is that fund managers make money no matter how the investment performs, which provides little incentive to spend time on finding an investment that performs well. You will only make money if the mutual fund gets bigger and increases in value over time. So the fund managers focus their time and energy more on bringing in new investors, but not driving the value through investment choices. That conflict of interest is a core problem.
His third reason is the demonstrable problems in the financial/investment industry. Wells Fargo is a classic example in recent news. 5,000 people were fired, but probably not a lot of the people responsible for the decisions behind the alleged fraud in which millions of accounts were set up for individuals without their knowledge or permission.
The faith in mutual funds is also misplaced. It’s not just an easy and safe investment. When $16 trillion is involved, there are those that will find a way to benefit at the expense of others (i.e. fund managers taking advantage of the investors).
A standard investment rule is T+3, which means you should be able to get your money out within three days of the transaction. In 2014, TIAA-CREF settled a lawsuit with almost 60,000 college professors for holding on to funds for up to 10 weeks after a transaction. Professor Birdthistle was one of them! In those intervening weeks, TIAA-CREF was making money from him as an investor and denying him the opportunity to invest those funds through other transactions.
Professor Birdthistle acknowledged that the best advice is usually boring. Find the cheapest investments and don’t touch them. We tend to not think that “cheap” is a better investment because that concept doesn’t translate into our other experiences, such as the price of haircuts or, perhaps, tacos.
The professor stated that the fee you pay is the biggest drag on your investment.
The last chapter of the book focuses on how to fix the problem of saving and investing for retirement. If the claim is there is not enough money in the bucket when we retire, the usual proposal is to just pour more money into the bucket. One way of doing this is auto-enrol in investment accounts where the investor has to opt-out rather than opt-in. Another suggestion is auto-escalation that increases the deposits by 1% or 2% each year. Professor Birdthistle thinks those ideas are great but it’s also like saying the house is a little too cool in the summer, so let’s cut back on air conditioning, without considering other options such as keeping doors and windows open.
He advises licensing for investors who want to use anything but passive funds–not just fund managers. He also recommends that investors take a test for competency in the field. However, not surprisingly, there is a lot of push-back on this within the financial industry. Active funds rarely return greater results than passive funds, but the fees are still higher. Some in the industry have said that we shouldn’t bother with licensing the management of active funds, that we should just ban these types of funds altogether! The professor acknowledged that this might be a bit extreme. Others in the industry have suggested pushing financial literacy. The real overarching issue is why anyone would care about other people’s savings (a libertarian argument). To answer that he thinks back to smoking–why should anyone care? There isn’t secondhand investing like secondhand smoking. But who’s paying the health bills? In turn, who is paying when older Americans don’t have the money to support themselves? The government and the rest of us (taxpayers) will be responsible to raise those funds unless we just callously choose to forget these people.
If the baby boomer retiring block wakes up and realizes this danger they’ll have to ask for a bailout, just like Wall Street in 2008. Then all American taxpayers will be on that financial hook.
Professor Birdthistle offered another radical suggestion–a good retirement plan for everyone. If you look at these lawsuits at universities or at companies like Boeing or John Deere, what they are often accused of is providing too many fund options. Those actions possibly violate ERISA laws that require a “prudent” group of funds which are whittled down responsibly. For every 20 new choices, participation goes down by 2 to 3 %. Also, why are such expensive funds (by fees) included as options? Because companies like Fidelity make more money from those funds.
For those without retirement plans accessible through the workplace, the professor suggested thrift savings plans that are very inexpensive.
Lastly, the professor stated that the SEC needs to do their job and really watchdog the industry–especially for fund management fees. The wrong companies are being sued. They need to sue the smaller companies that are the really bad players and taking the most advantage of investors.
CALL Member Questions
Are there any models for retirement investing/planning outside the U.S. that work really well?
Chile. The government promises a floor–a base amount of support and 401(k) options for additional investments. This is feasible because Chile’s economy is much smaller than ours. Additionally, Americans have long life expectencies and healthcare in America is very expensive. Plus, our backup systems like the Pension Benefit Guaranty Corporation (PBGC) and Social Security are deep in debt. Australia is another successful example which requires savings–essentially a better run Social Security system.
When will the Fed raise rates so that savings accounts once again make money?
The Fed has chosen to encourage business investment which is costly to those living off interest income. Other nations’ governments are focusing more on the individuals rather than the larger economy.
If we manage our funds well, but another market-crashing event like Brexit happens, what should we do?
Wait it out–markets come back and our government is still the best investment on the planet. The professor admitted that this is hard advice to take. He recommends using target date funds (based on retirement date) to weather against the panic. However, there have been some problems with these funds. They are expensive and some have failed to move investments into less risky categories as the fund approached the target retirement date.
What are your thoughts on the new fiduciary rule for broker-dealers?
What impresses him the most is that if you are a broker-dealer you have to treat your client like you are a fiduciary, just like investment advisers are required to do. Before this rule was enacted, broker dealers just had to recommend “suitable trades” which has not been well defined. So they would recommend investments that paid them the best commission–regardless of the performance of the investment. What also surprised him was the outraged reaction of the broker-dealer industry. That industry is suing to have this rule undone. They’re claiming that this will be more expensive for everyone because they’ll have to get more training. He doesn’t buy that argument. But he only thinks this implementation of this rule will be successful if the SEC backs it up. Right now this is just a Department of Labor rule effecting ERISA only.
Robert Martin, Community Service
On behalf of himself and co-chair Julie Swanson, Robert thanked everyone for their contributions over the past year. The committee has big plans ahead for the 70th anniversary but asked for suggestions for community service recipients or projects. The September Business Meeting’s cash donations will go to the Rolfe Pancreatic Cancer Foundation, a Chicago-based organization. The November meeting donation recipients will be an organization supporting homeless veterans. February’s recipients will be Greater Chicago Food Depository. They are still looking for ideas for the May business meeting.
Julie Pabarja, Grants and Awards
Julie reminded the membership that CALL has money available for conferences and other educational opportunities. Please reach out to the committee if you have questions about applying or if you have suggestions for events or programs that might qualify for grants so that those can be shared with the membership. The grant application form can be found on the CALL website.
Joe Mitzenmacher, Government Relations
Joe reported on the presentation of the Legislator of the Year Award to Congressman Mike Quigley (Fifth Congressional District) for his work on open governance initiatives. Rep. Quigley is co-chair of the bi-partisan Congressional Transparency Caucus. That caucus has worked to make CRS reports more accessible to the public and to provide easier access to PACER and FOIA amendments. The award was presented at his office in August.
Door Prize Drawing
Todd and Clare thanked LexisNexis for providing the door prizes at today’s meeting. The winners were Susan Berg, Cheryl Kruger, and Anita Calderon.
Adjournment and Next Meeting
Todd adjourned the meeting and reminded the membership that the next business meeting will be held on November 17th at Rock Bottom Brewery.