Current Events > Pension fund managers have cost Americans more than $600b in the past decade

(+) Yeah! (+)

https://finance.yahoo.com/news/wall-street-managers-cost-americans-600-billion-past-decade-134658282.html

Over the last decade, fund managers who oversee the pensions of the nations teachers, firefighters, police and other government workers have doubled down on an investment strategy that has cost U.S. taxpayers at least $600 billion, possibly more than $1 trillion, investment data and calculations by Yahoo Finance found.

Seeking higher gains, pension fund managers have upped their investment in so-called alternative strategies that are costly and weigh down returns, data shows.

We find that some of the worst-performing plans are those that went into alternatives late in the last decade, said Jean-Pierre Aubry, a research director at the Center for Retirement Research at Boston College who studied the impact of investing in alternatives on public pension funds.

Alternative funds invest in things like hedge funds, private equity, real estate or commodities, rather than traditional stocks and bonds. Because pensions are guaranteed, the underperformance has hit taxpayers in the form of budget cuts for schools, hospitals and libraries and decreased spending on infrastructure, health care and other public projects.

Aubrys studies show that across the board, public pension fund managers have thrown increasingly more money at these complex and pricey alternative funds, despite the fact that they consistently underperform simple index funds available for a fraction of the fee cost.

Fund managers have moved to alternative investments, in part, because when competing for the contracts to manage pensions, they sold pension boards on expected high returns that have not materialized. They are now trying to provide a jolt to the plans, which are largely underfunded, said Scott Kubie, chief investment officer at financial management firm Carson Group.

Those high assumptions allowed [the employees] to make not as high contributions, Kubie told Yahoo Finance. Theyre trying to find a way to catch up because they havent covered the liabilities. I dont know if that ends particularly well.

Several studies have shown that pension fund managers are unable to consistently beat the market. And the growing popularity of alternative investments has only exacerbated the trend.

Data from the Center for Retirement Research at Boston College shows that state and local pension plans steadily increased their holdings of alternative investments, rising from 9% in 2005 to 24% in 2015. A 2017 study from Coller Capital found that a net 23% of investors plan to increase their allocations to private equity over the next 12 months.

With the nations pension liabilities having risen to $6 trillion, Jeff Hooke, a lecturer at Johns Hopkins University, recently conducted a report for the Maryland Public Policy Institute that found the state had lost billions in retiree income on account of the fees and lost revenue.
...
The nations pension fund returns have also been hit by fees. Hookes study found that state pension funds paid, on average, fees totaling 0.56% of assets held to fund managers during the 10-year period. Had the nations collective pension fund managers invested in the 60/40 Vanguard Balanced Index Fund, for example, which carries a 0.07% fee, they would have saved $150 billion over 10 years.

In fact, the total amount pension funds could have saved by simply investing in index funds could be more than $1 trillion. In addition to the lower returns and higher fees that add up to $624 billion, data for 17 states were not disclosed, and the calculations dont include funds contributed by workers and employers during the 10-year period.

---

Get in the car lets go kick some asses.
---

People who work on commission get paid commission?

Hold on, I didn't catch the "public" part there, the first time.
Prison terms are in order here, assuming fraud and/or negligence laws apply to this sort of thing.

No, we should be mad at poor people and immigrants! Postinisthis means you hate success and love class warfare.
---

Questionmarktarius posted...

People who work on commission get paid commission?

Plenty aren't fudiciaries and are literally robbing people because they don't have a legal obligation to act in their best interests.

Personally I blame the individual though. My job offers a SIMPLE IRA through Fidelity, money set aside for retirement sits in a money market account and it's your responsibility to invest it. I talked to my coworker about it and he didn't realize this, his money has been sitting in the account earning nothing. He missed 15 years of investment growth.

None of my coworkers realized they could invest their HSAs either. These people are uneducated.

Ira bby
---

clearaflagrantj posted...

Personally I blame the individual though. My job offers a SIMPLE IRA through Fidelity, money set aside for retirement sits in a money market account and it's your responsibility to invest it. I talked to my coworker about it and he didn't realize this, his money has been sitting in the account earning nothing. He missed 15 years of investment growth.

In this case its a public worker pension fund, though. You don't get to pick what your pension is invested in. You're right that a lot of people don't properly invest their 401K, though.
---

Master_Bass posted...

clearaflagrantj posted...

Personally I blame the individual though. My job offers a SIMPLE IRA through Fidelity, money set aside for retirement sits in a money market account and it's your responsibility to invest it. I talked to my coworker about it and he didn't realize this, his money has been sitting in the account earning nothing. He missed 15 years of investment growth.

In this case its a public worker pension fund, though. You don't get to pick what your pension is invested in. You're right that a lot of people don't properly invest their 401K, though.

My mistake for conflating pensions and 401ks. Are pension managers required to be fudiciaries?

you can be a fiduciary and still make shitty investments
---

Questionmarktarius posted...

Hold on, I didn't catch the "public" part there, the first time.
Prison terms are in order here, assuming fraud and/or negligence laws apply to this sort of thing.

I don't think it's fraud or negligence. It's just that people still think that they can beat the market if they get a fund manager who gets paid commission. When in reality, you'd be better off tracking the market via index funds and investing for the long-run.

There's a reason why savvy investors recommend low-cost funds from Vanguard or Fidelity over actively managed funds.
---

So if I understand correctly: Pensions have opted for active managers rather than cheap, passive strategies. The strategy hasnt so much lost money as it underperformed those passive strategies. That $600b number is not really a loss, but rather its underperformance. Hedge funds dont do well in an environment where the stock market rises on auto-pilot for close to a decade.

I dont appreciate the fact that these pensions are guaranteed though. People will flee states like Illinois over confiscatory property tax rates, and the problem wasnt simply caused by hedge fund fees.
---

clearaflagrantj posted...

None of my coworkers realized they could invest their HSAs either. These people are uneducated.

lol theres pretty much no reason to have an HSA if you dont invest it
---

the pension fund collapse is going to be insane

turns out you can't promise 10% returns a year, every year, forever
---

FLUFFYGERM posted...

Questionmarktarius posted...

Hold on, I didn't catch the "public" part there, the first time.
Prison terms are in order here, assuming fraud and/or negligence laws apply to this sort of thing.

I don't think it's fraud or negligence. It's just that people still think that they can beat the market if they get a fund manager who gets paid commission. When in reality, you'd be better off tracking the market via index funds and investing for the long-run.

There's a reason why savvy investors recommend low-cost funds from Vanguard or Fidelity over actively managed funds.

There has been chatter for years that a bubble is brewing in passive strategies due to the rise of ETFs. For much of the past decade investors made bank while throwing money at ETFs because Fed policy sent stock valuations to the moon. So a bunch of companies received big investments by virtue of being included in an index.

There hasnt been a bear market since ETFs became so popular. I wonder what it looks like when they are sold in mass rather that bought in mass.
---

tennisdude818 posted...

People will flee states like Illinois over confiscatory property tax rates, and the problem wasnt simply caused by hedge fund fees.

Exactly. And we already see it happening. Illinois is getting ravaged by the high property taxes. It's legalized theft - the state is literally taxing old people and families out of their homes (sometimes paid off homes). Yet the usual suspects won't ever mention that.
---

AlephZero posted...

the pension fund collapse is going to be insane

turns out you can't promise 10% returns a year, every year, forever

Yeah I guess Meredith Whitneys doomsday predictions will eventually come true.
---

tennisdude818 posted...

FLUFFYGERM posted...

Questionmarktarius posted...

Hold on, I didn't catch the "public" part there, the first time.
Prison terms are in order here, assuming fraud and/or negligence laws apply to this sort of thing.

I don't think it's fraud or negligence. It's just that people still think that they can beat the market if they get a fund manager who gets paid commission. When in reality, you'd be better off tracking the market via index funds and investing for the long-run.

There's a reason why savvy investors recommend low-cost funds from Vanguard or Fidelity over actively managed funds.

There has been chatter for years that a bubble is brewing in passive strategies due to the rise of ETFs. For much of the past decade investors made bank while throwing money at ETFs because Fed policy sent stock valuations to the moon. So a bunch of companies received big investments by virtue of being included in an index.

There hasnt been a bear market since ETFs became so popular. I wonder what it looks like when they are sold in mass rather that bought in mass.

Ultimately the value of an index will still go up in the long run, because the over-all economy will grow in the long-run. A correction wouldn't be pretty, but it wouldn't be disastrous for people who have a lot of money in indexes. Unless they sell everything during the downturn because they're panicked. Then they're fucked.

I'm also skeptical that we'll see a bear market anytime soon.

https://www.marketwatch.com/story/the-bear-case-for-stocks-is-so-obvious-it-cant-be-right-2018-07-12
---

green butter posted...

clearaflagrantj posted...

None of my coworkers realized they could invest their HSAs either. These people are uneducated.

lol theres pretty much no reason to have an HSA if you dont invest it

Well at least it's pretax money and most companies match a percentage IIRC

I love my HSA I don't even use it for health expenses, I just let that shit grow wild

clearaflagrantj posted...

I love my HSA I don't even use it for health expenses, I just let that s*** grow wild

After a certain age (65 I believe) it just converts into a regular retirement fund that you can draw from for any reason. So if you're reasonably healthy, fill that shit up each year and let it grow grow grow. Contributions, growth, and withdrawals are all tax-free at that point AFAIK.
---

Government pay is, in most cases, far inferior to the private sector. I assume the issue is all the good fund managers have good, high paying private sector jobs, leaving the failures and drop outs who go find government fund manager jobs that have high job security and crazy good lifetime benefits.
---

FLUFFYGERM posted...

tennisdude818 posted...

FLUFFYGERM posted...

Questionmarktarius posted...

Hold on, I didn't catch the "public" part there, the first time.
Prison terms are in order here, assuming fraud and/or negligence laws apply to this sort of thing.

I don't think it's fraud or negligence. It's just that people still think that they can beat the market if they get a fund manager who gets paid commission. When in reality, you'd be better off tracking the market via index funds and investing for the long-run.

There's a reason why savvy investors recommend low-cost funds from Vanguard or Fidelity over actively managed funds.

There has been chatter for years that a bubble is brewing in passive strategies due to the rise of ETFs. For much of the past decade investors made bank while throwing money at ETFs because Fed policy sent stock valuations to the moon. So a bunch of companies received big investments by virtue of being included in an index.

There hasnt been a bear market since ETFs became so popular. I wonder what it looks like when they are sold in mass rather that bought in mass.

Ultimately the value of an index will still go up in the long run, because the over-all economy will grow in the long-run. A correction wouldn't be pretty, but it wouldn't be disastrous for people who have a lot of money in indexes. Unless they sell everything during the downturn because they're panicked. Then they're fucked.

I'm also skeptical that we'll see a bear market anytime soon.

https://www.marketwatch.com/story/the-bear-case-for-stocks-is-so-obvious-it-cant-be-right-2018-07-12

Yeah I agree that indexes will go up in the long run. As for a bear market, if I could time that I wouldnt need a day job. I do think there is way too much credit growth out there, and rising rates will eventually force defaults. You cant keep rates close to 0% for 10 years and not cause malinvestment in the process. I see it in auto loans and tech IMHO.
---

These are supposed to be the "experts"
---

the CEOs of big american state pensions get paid like $500k a year
that's not close to enough to get good people

the canadian pension plans are much better, and are basically the envy of the rest of the pension world
---

s0nicfan posted...

Government pay is, in most cases, far inferior to the private sector. I assume the issue is all the good fund managers have good, high paying private sector jobs, leaving the failures and drop outs who go find government fund manager jobs that have high job security and crazy good lifetime benefits.

no

that is incorrect

plan management is contracted to private firms

most support work for government projects is not done by government workers. IT is all by contract as well, for example.
---

s0nicfan isn't really wrong, that's essentially the point i was making as well
---

lesidesi posted...

s0nicfan isn't really wrong, that's essentially the point i was making as well

what is it, 20% of mutual funds that outperform the S&P500 index on an annual basis? and not the same ones year after year

he's wrong to suggest the problem is 'those dumb government workers', and while they're not paying their active managers as much as others, any active manager who doesn't beat a passive strategy on a decade timeframe has no reason to exist
---

i mean you're getting into a philosophical active vs passive debate, but the reality is that often, the folks that claim active managers usually underperform aren't looking at volatility of returns or beta

There are plenty of shit money managers, but on a risk adjusted or beta adjusted basis, which is how these things should be measured, good active managers are definitely value add
---

That's a very fair point. Passive is high beta by design.

Granted, investing some of the plan assets in bonds is another way to move along the risk-return curve. It's not like active funds are reliably going to penetrate far past the efficient frontier of the pareto curve. But they could be paying for much better than they are.

PS: Going to be in London in Sept, staying in Soho. Anything you'd recommend I check out?
---

that's the comparison people need to do to measure active managers, but that isn't typically what's reported

people will write articles in a 10% market year and criticize active managers for making 9%, even if the manager is running a 60% exposure to equities, which isn't a fair comparison
---

Darkman124 posted...

That's a very fair point. Passive is high beta by design.

Granted, investing some of the plan assets in bonds is another way to move along the risk-return curve. It's not like active funds are reliably going to penetrate far past the efficient frontier of the pareto curve. But they could be paying for much better than they are.

PS: Going to be in London in Sept, staying in Soho. Anything you'd recommend I check out?

try to go to the restaurant Kitchen Table (if you're a foodie) - one michelin star restaurant that deserves more - make the reservation now
skip a lot of the lame touristy shit like madame tussauds
tate britain and tate modern are probably worth visiting if you haven't been before
saatchi if you like weird art shit
try to catch a play at the globe, an london symphony orchesta concert, and a football game (chelsea!!)
---

i saw rock of ages at the globe six years ago. great place, definitely going back! i think their prices for hamilton are less than ours here in DC, amazingly.

have been to tate modern, i think. will definitely check out saatchi. definitely not looking for the touristy stuff, aside from st. paul's, which i did last time i was in london.

gonna try to talk my wife into booking kitchen table tonight. thanks for the tips!
---

also: we were trying to ride in hyde park but apparently there's a 180lb weight limit. what's up with that? i was able to ride icelandic ponies no problem :(
---

i dont even know what that is
---

The article is basically stating that pension funds themselves are to blame.

But that would imply that public sector unions are a problem, and we can't say that.
---

Coffeebeanz posted...

But that would imply that public sector unions are a problem, and we can't say that.

The unions are largely the reason the pensions exist, yes, but grossly mishandling them is a separate issue.

Coffeebeanz posted...

The article is basically stating that pension funds themselves are to blame.

But that would imply that public sector unions are a problem, and we can't say that.

The article says the funds have been mismanaged, which is not the fault of unions
---

Antifar posted...

Coffeebeanz posted...

The article is basically stating that pension funds themselves are to blame.

But that would imply that public sector unions are a problem, and we can't say that.

The article says the funds have been mismanaged, which is not the fault of unions

It's saying they're mismanaged because they've ballooned in cost.
It's almost like indefinitely paying someone who is no longer working is a financially unsustainable proposition.
---

green butter posted...

clearaflagrantj posted...

None of my coworkers realized they could invest their HSAs either. These people are uneducated.

lol theres pretty much no reason to have an HSA if you dont invest it

Above the line tax deduction. It's hard to deduct your medical expenses otherwise.
---

Coffeebeanz posted...

It's saying they're mismanaged because they've ballooned in cost.

that is incorrect

it's saying they're mismanaged because they've been unable to hit annual performance targets that were set long ago, and in an effort to 'catch up' they divested into alternatives that further under-performed (ironically, right when the original assets started really taking off)

whether those targets are realistic is a separate discussion
---

clearaflagrantj posted...

None of my coworkers realized they could invest their HSAs either. These people are uneducated.

...

hold on. you can invest your HSA? I get $1600 or something like that added to mine automatically each year based on my health plan. I've got something like $8k in my HSA and I get charge a fucking fee every year for having money sit in there. It's done through my company, not private, but I've never seen an option to invest it.
---

Antifar posted...

The article says the funds have been mismanaged, which is not the fault of unions

Aren't the pension boards which govern the decisions about how to manage the funds largely composed of union members?
---

Balrog0 posted...

Aren't the pension boards which govern the decisions about how to manage the funds largely composed of union members?

generally speaking the board can pick fund managers but they dont pick the investment assets themselves
---

interesting

so this kind of thing: https://ns0.artrs.gov/PolicyManual/Investment/5-3_Asset_Allocation.pdf

isn't standard?
---

I'm seriously asking, I don't know shit about this issue other than education pensions are always big political fights
---

The Board of Trustees is responsible for the prudent investment of funds

that does not seem standard to me
---

Darkman124 posted...

The Board of Trustees is responsible for the prudent investment of funds

that does not seem standard to me

it is not
---

it's very standard for pension plans to have board approval on investments

boards have to approve asset allocation, have to approve large investments, etc

there are usually investment teams underneath that have some degree of bandwidth, but on large investments that have to be approved by the board

changes to proposed asset allocation also has to be approved by the board
---

I guess the question here is what responsible means

If they are just the final approval of what an actual manager is researching it doesnt seem unusual

But this isnt my area of expertise, and it is lesidesi's
---