State workers lose millions to bond fund

Officials consider suit against company that managed retirement investment

Posted: Tuesday, October 09, 2007

After a supposedly low-risk bond fund in which 1,100 state employees invested their retirement money plunged in value in August, state officials are considering pursuing legal action against one of the nation's top mutual fund companies.

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The Alaska Retirement Management Board in August held an emergency meeting and voted to remove State Street Corp.'s Daily Government/Corporate Bond Fund from a list of investment options for state employees after a disastrous August.

"There was a fairly substantial loss in value," said Jerry Burnett, the Department of Revenue's legislative liaison.

The State Street fund held $36 million in state employee money as of June 30, state records show. By the time the ARM Board held an emergency meeting on Aug. 24, it had fallen to $30 million.

"Since this was intended to be one of the least risky investment options, that was not good," Burnett said.

Alaska is not the only State Street client with concerns.

Prudential Financial Inc. last week sued State Street over losses in 165 retirement funds it manages, and the state of Idaho is considering legal action as well, according to the Wall Street Journal.

Alaska retirement officials say the fund was supposed to track a well-known Lehman Bros. bond index, but instead plunged dramatically lower than the index.

While the index rose 3 percent so far this year, the Daily Corporate/Government Bond Fund fell 18 percent, Burnett said.

If State Street's managers were investing in something other than what the fund was expected to invest in, that might be the basis of a legal claim, Burnett said.

Department of Law attorney Mike Barnhill said it was too soon to tell whether it might be possible for the state to recoup from State Street money lost by its employees.

"We are now trying to figure out what is up and what is down," he said.

The money that had been in the State Street fund has since been transferred to a new fund, the Barclays Lehman Bros. Government/Credit Bond Index Fund.

While all investments have risk, the State Street fund was not expected to do what it did. A Department of Revenue portfolio manager noticed when the fund began to deviate from the index it should have been tracking, and the deviation was brought to the board's attention, Burnett said.

Representatives of State Street, based in Boston, did not return messages left Monday at the end of the East Coast business day.

The Daily Government/Corporate Bond Fund was one of 14 options available in the SBS Supplemental Annuity Plan and one of 10 investment options in the new Public Employees' Retirement System and Teachers' Retirement System defined contribution plans.

The fund should have been among the least risky investment options available and is typically used by those nearing retirement and wanting to take less risk with their retirement nest egg.

Burnett told the Journal the losses might force some workers to delay retirements.

State Street is one of the nation's largest financial firms, holding assets worth $13 trillion and actively managing assets worth nearly $2 trillion. In addition to the bond fund, State Street continues to manage hundreds of millions of dollars of other types of investments for the Retirement Management Board.

State Street manages some stock investments for the Alaska Permanent Fund Corp., but none like the retirement fund, said Laura Achee, fund spokesperson.

"State Street is not one of our bond managers," she said.

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