Firm to replace losses in state retirement fund

An investment management firm who state officials say mismanaged some retirement accounts is reimbursing a total of almost $6 million to those who lost money, said Brian Andrews, deputy commissioner of the Alaska Department of Revenue.

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"I'm tickled pink," Andrews said.

The reimbursements will be distributed to more than 1,000 state employees, mostly those in the Supplemental Benefit System, in varying amounts.

State Street Global Advisors touted the Daily Corporate/ Government Bond fund as an ultra-safe investment that was intended to track a market index and only invest in low-risk securities.

The higher-risk investments, including some backed by subprime mortgages, could have boosted returns above competitors, but instead lost much of their value when markets turned down.

The bond fund was one of a limited number of investment options available for employees in SBS, as well as those in deferred compensation and the new defined contribution plans.

The bond fund was billed to employees as a conservative investment for those hoping to avoid risk, such as employees nearing retirement.

Andrews said a few state employees may have had to delay planned retirements after the losses became public in August.

One person lost nearly $70,000, he said.

"I believe we are the first entity, at least state entity, to settle with State Street," Andrews said.

The agreement with State Street was reached in late December and letters went out to 1,289 affected employees and retirees offering the settlements.

Last week, State Street announced it was setting aside $618 million to deal with lawsuits and costs due to claims of mismanaged bond investments nationwide. Several suits already have been filed against State Street by retirement plan managers. Alaska had not yet filed a suit.

More than half of those affected who have been notified of the settlement have agreed to accept the offer and waive their right to sue State Street or Alaska, said Pat Shier, director of the Division of Retirement and Benefits for the Department of Administration.

Shier said the settlement is so good there would be no reason not to take it.

"I can't think of a situation where somebody wouldn't be agreeing to receive the settlement," he said.

Andrews said not only was the principal returned, but State Street also paid the amount the employees would have earned had the bond fund been invested in appropriate investments.

The Division of Retirement and Benefits was so eager to conclude the issue that it sent out response envelopes with the notification letters to speed replies, Shier said.

"We are interested in concluding the matter as soon as possible," he said.

The settlement agreement is slightly complicated in that State Street will pay half the settlement amount and Alaska will pay the other half. Then, State Street will waive some fees on other investment accounts it manages for Alaska, which will save the state its share of the settlement costs.

Why State Street wanted the settlement structured that way is unclear, and a spokesman for the Boston-based company was unavailable Monday. The settlement may let State Street appear to be paying less than the full amount of the losses, however.

Andrews declined to provide a copy of the written settlement agreement with State Street, referring the request to the Department of Law. Assistant Attorney General Mike Barnhill was not available Monday.

"State Street did step up to the plate. They made the situation right," Andrews said.

The huge investment management company has multiple relationships with the state of Alaska, including managing state funds, retirement funds and a portfolio for the Alaska Permanent Fund.

• Contact Pat Forgey at 523-2250 or patrick.forgey@juneauempire.com.