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After more than 1,000 state employees lost a total of about $5.65 million in their retirement accounts in an unexpectedly risky bond fund, some critics of changes to the retirement system last year say they shouldn't have been investing there anyway.
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The Alaska attorney general is reviewing possible legal action to recoup lost money, a spokesman said.
Last year Alaska shifted from a defined-benefit retirement plan for new employees to a defined-contribution plan, similar to a 401(k), over the objections of many state worker representatives and most Democratic legislators.
"It's a great example" of what unions warned about, said Jim Duncan, business manager for the Alaska State Employees Association, the state's largest union.
Instead of expert state financial managers managing the retirement funds, each employee will be responsible for managing his or her own retirement savings.
"All the risk is shifted off to the employee - the vagaries of the stock market will decide what people end up with," Duncan said.
Sen. Kim Elton, D-Juneau, opposed the adoption last year of Senate Bill 141, which ended enrollment in the state's Tier III retirement plan and created a new Tier IV, modeled after a 401(k) plan, for the Public Employee Retirement System. Teachers were given a similar plan.
Elton said he hopes the problems with a fund managed by State Street Corp. in August will reveal the risks of the system the state adopted and lead to going back to the old system.
"Will this compel us to revisit a bad decision? I hope so," Elton said.
State Sen. Bert Stedman, R-Sitka, said the Alaska Legislature made a good decision when it established a retirement system that gave employees more control over their futures, though it did expose them to some more risk.
"You can't accumulate wealth through riskless endeavors," he said.
The State Street Fund was a very small part of total state investments, and Revenue officials caught and stopped the problem.
"The system is in place to catch that, weed that out, and replace it with another investment selection," Stedman said.
State Street Corp.'s Daily Corporate/Government Bond Fund fell dramatically in August, while the index it was designed to track rose slightly, said Brian Andrews, deputy commissioner of the Department of Revenue.
That troubled the state's investment officers, Andrews said. Typically bond funds are low-risk investment options, and are used by those nearing retirement who don't want to take as much risk as a younger person might.
When the fund began deviating from the index it was supposed to track, Revenue officials began trying to figure out why.
We "started making some hard inquiries," Andrews said.
What they learned was that the fund had been using borrowing, called "leverage" in the financial world, to boost fund returns.
Andrews said that was not something expected out of a conservative bond fund.
"Once we learned the amount of leverage," the department convened an emergency meeting of the Alaska Retirement Management Board to get out of the fund.
"We had lost faith in State Street at that point," he said.
Losses to Alaska employees amounted to about $5.65 million, Andrews said.
State Street Corp., based in Boston, has not responded to repeated contacts by phone and e-mail from the Empire.
A State Street spokesperson told the Wall Street Journal that Alaska and Idaho, where employees also lost money, "remained valued clients."
"We still have a relationship with State Street," Andrews confirmed.
State Street is one of the nation's largest investment companies, holding assets worth $13 trillion in custody. They actively manage nearly $2 trillion for clients, such as Alaska.
State street told the Journal "we are confident that we comprehensively and accurately communicated the investment objectives of the funds in which they were invested."
The Journal quoted a letter from State Street's chief investment officer as acknowledging that many of its funds had "sharply underperformed," but that the level of underperformance was "unprecedented in our 30-year history as a fixed-income manager."
Fixed-income investments, such as bonds, typically pay interest and don't fluctuate as much in value as do stocks.
Andrews, deputy commissioner for revenue, said he has received little information from State Street about what went wrong with the bond fund.
"I've never seen that letter," he said. "I have not received anything in writing from State Street."
He said the division is watching its remaining $3.5 billion in State Street investments closely, but they're not concerned about their other investments the company manages.
The other investments are all in index funds, which buy the exact same stocks in indexes such as the Standard & Poor's 500 and mimic their returns or the returns of the overall market.
Union representative Bruce Ludwig of the Alaska Public Employees Union said the state should go beyond simply pursuing legal action against State Street. It should instead make employees whole after having selected an inappropriate investment for them.
"If they're not being prudent in monitoring it, they could be liable," Ludwig said.
Andrews referred questions about state liability to Mike Barnhill of the attorney general's office. He declined to comment.
Contact Pat Forgey at 523-2250 or email@example.com.