Pension managers’ strategy cost retiree accounts up to $1 trillion

Bill Knight column for Mon., Tues. or Wed., August 6, 7 or 8, 2018

Since the 2008 financial crisis, Wall Street pension-fund managers have cost between $624 billion and $1 trillion from Americans’ retirement savings – and, indirectly, taxpayers. This happened through managers’ brutal “mix of poor performance and high fees,” according to a news analysis published July 12 by Yahoo Finance.

Most of the losses came from these pension managers’ commitment to “alternative funds,” which invest in private equity and hedge funds instead of traditional stocks and bonds, according to reporter Dion Rabouin.

Over the last decade, fund managers who oversee public pensions for teachers, firefighters, police and other government workers have stepped up the alternative-fund strategy, which has cost U.S. taxpayers hundreds of billions of dollars, investment statistics and calculations by the news site showed.

“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,” Rabouin said.

Jean-Pierre Aubry, a research director at the Center for Retirement Research (CRR) at Boston College, said, “We find that some of the worst-performing plans are those that went into alternatives late in the last decade.”

Alternative funds invest in things like real estate, commodities, hedge funds and private equity, not stocks and bonds. That approach was pursued despite an overall trend in the opposite direction, Rabouin reported. Data from Morningstar Direct obtained exclusively by Yahoo Finance shows the average cost of investment funds has declined and that far more 401(k) fund managers are choosing to go with the cheapest funds.

Fund managers convinced pension boards to expect high returns, which didn’t materialize, so now they’re trying to jump-start the plans (which are mostly underfunded), according to Scott Kubie, chief investment officer at financial management firm Carson Group.

 “They’re trying to find a way to catch up,” he said, “because they haven’t covered the liabilities. I don’t know if that ends particularly well.”

CRR data shows that state and local pension plans steadily increased their holdings of alternative investments, rising from 9 percent in 2005 to 24 percent in 2015.

With the nation’s guaranteed pension liabilities having risen to $6 trillion, Johns Hopkins University lecturer Jeff Hooke recently conducted a study for the Maryland Public Policy Institute that found that that state alone had lost billions in retiree income because of managers’ fees and revenue lost to their decisions.

Hooke and co-author Carol Park found that of the 33 states for which data was available, the average state pension fund returned 5.46 percent over the decade ending in June 2017. A sample index fund of 60 percent stocks and 40 percent bonds returned 6.4 percent on an annualized basis during that time, they found.

“In fact, the total amount pension funds could have saved by simply investing in index funds could be more than $1 trillion,” Raboulin wrote. “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 don’t include funds contributed by workers and employers during the 10-year period.”

Capital & Main journalist David Sirota observed that in five years of reporting on Wall Street’s investment tactics, he’s found that “most people (including policymakers) still have no idea that skimming fees off public employees’ retirement savings has become one of the largest sources of profits for Wall Street moguls.

“Yet the political conversation over public pension shortfalls basically blames ripped-off public employees for being greedy,” he added.