(April 23, 2012) — Public pension funds are paying too much in fees to fund managers and consultants, sources say in response to a recent investigation that showed that the $37 billion Teachers Retirement System (TRS) of Illinois paid $1.3 billion in fees to hundreds of financial managers over the last decade.
The recent investigation, completed by the Better Government Association (BGA), alleged that the scheme’s average rate of return on investments between 2001 and 2010 was just 3.7% excluding the cost of fees, far below its 8.5% annual target return. Including fees, the scheme’s return during the period was 3.3% — a figure slightly under the median of 3.4% for public pensions during the time frame.
While the Illinois scheme alleged that a lack of adequate contributions made by the state Legislature explain its state of insolvency by possibly 2030, Ralph Hodge, managing partner and co-founding member of SilverLeaf Capital Advisors, noted that the pension’s response reflects finger-pointing. “When you don’t have the ability to change what’s going on in your fund, you set yourself up for bad outcomes,” said Hodge. “They blame the state, the market — they’re adhering to the status quo while trying to blame others.”
Hodge added that among public pension funds, fees paid out to fund managers and consultants are a huge percentage of total return. “I view public pensions as a breeding ground for consultants and asset managers to collect fees,” he said.
Industry sources note that pensions often lack adequate accountability, failing to question what they could do differently when failing to meet annual return goals. “Across the industry, funds don’t ask often enough how consultants and fund managers can improve — they’re being paid to deliver something but often, due to their colossal fees, they actually impair pensions from achieving their goals,” Hodge said.
Another source noted that the issue of fees among pensions stems not from portfolio returns but from the value received from service providers, including asset managers. “Aggregating performance distorts the value creation and destruction provided by the individual managers,” said Angelo Calvello, CEO of Impact Investment Partners LLC.
In response to the critiques, TRS spokesman Dave Urbanek told aiCIO: “Our pension is not going to get into a debate about our investment strategy. If anyone has another opinion that’s for them…we have professionals on staff and will do whatever we can to provide for our members.”