Monday, September 25, 2006

The Problem With State DB Plans

I think this is one reason why government defined-benefit plans are a terrible idea. Schwarzenegger signed a bill that bars state investment plans from investing in Sudan because of the Darfur crisis. No doubt it's well intentioned, but what does the Darfur crisis have to do with getting an adequate ROI? The problem is that decisions are being made on a political basis rather than an economic one. Since CalPERS has hundreds of billions in assets, it has a lot of clout. CalPERS desparately needs to be reformed into a defined-contribution plan so individuals can control where the money goes.

Update: After rereading the last sentence opf my post I think that I should elaborate more. If individuals controlled where their contributions went they could base their decisions on politics, but my guess is their main concern would be achieving a satisfactory ROI.