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State pension funds are paying record fees to Wall Street money managers, while getting less-than-impressive results in return, says a recent study from two Maryland think tanks.
The Maryland Public Policy Institute and the Maryland Tax Education Foundation reviewed the annual financial data of major statewide retirement systems from 50 states.
According to the findings, state public pension funds spent over $7.8 billion in fees last year alone — a 15-percent increase over three years — despite the consistent failure of money managers to hit target returns or outperform passive equity index funds, which charge lower fees.
“The vast majority of public pension systems in the United States contract with Wall Street firms to select the publicly traded stocks and bonds that comprise the bulk of the systems’ investment portfolios,” says the study. “The firms’ typical 'sales pitch' is that they can 'outperform' a given section of the stock or bond market; therefore, the system should pay them a fee for their stock — or bond — picking prowess.”
Over the last 10 years, annual returns for large public funds averaged 5.9 percent versus expected target returns of 7 to 8 percent, according to the report.
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