Between 1999 and 2002, U.S. private pension funds lost US$1.2 trillion in value.

It turns out that $282.2 billion of the decline in private pension fund value over 1999 to 2002 was due to net withdrawals from these plans, but even so, the drop in market value amounted to $979.7 billion.

It would almost seem that pension fund managers had been speculating with retirement money, attempting to beat each others’ short-term performance statistics, with little interest in safeguarding the assets of plan beneficiaries.

But half of U.S. private pension funds were organized as ‘defined contribution’ plans, such as 401(k)s, in which the fundamental asset allocation decision was made not by fund managers, but by the plan beneficiaries themselves.

During the 1990s, millions of private ‘pension fund’ decisions were made not by pension fund managers but by unsophisticated workers who, believing the “Common Stock Legend“, blindly allocated their long-term assets to equity mutual funds.

In 2004, 44.4 million workers were insured by PBGC under ‘defined benefit’ private pension plans, which comes down to pension assets of about $40,000, on average, per worker — hardly enough to provide much of a ‘defined benefit’ in old age.

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The Federal Reserve Flow of Funds Table F118 (Private Pension Funds) shows that this sector continues its long-term pattern of selling equity positions and buying mutual funds.

This graph shows the investment behavior of private pension funds over the decade 1995-2004, compared with the recent data for Q3 2005.

	How Are Private Pensions Investing?

The graph reveals a marked flurry of portfolio activity in 1999, with heavy selling of equities in the year preceding the crash of August 2000.

After the crash of 2000, portfolio turnover for private pension funds diminished, although the pattern of selling equities and buying mutual funds continued.

This sector includes both defined benefit and defined contribution plans as well as 401(k) arrangements.

The Wall Street Journal has noted that New York Attorney General Eliot Spitzer’s investigation into kickbacks and other improper incentives in the insurance industry is widening and moving toward the area of employee-benefits.

Since there are real problems with the proper exercise of fiduciary responsibility for 401(k) plans, there could be long-term implications for capital flows, especially in the equity market.

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