The money managers hired to invest Pennsylvania’s public-worker retirement funds help themselves to eye-popping fees, each year collecting some $720 million.
That’s way too much money — paid by state residents — to shell out for financial experts. Especially when you consider most money pros who actively manage funds typically don’t supply better results over the long run than passive funds that simply mirror broad market indexes, such as the S&P 500.
Katie McGinty, chief of staff for Gov. Tom Wolf, mentioned the “exorbitant fees” collected by “Wall Street hedge fund managers” during a conversation last week with the Times Leader’s opinion board. The topic arose during a broader conversation about the governor’s proposed 2015-16 budget and the potential for state pension reform.
Abandoning these high-fee investments, however, shouldn’t hinge on budget negotiations or any other political hangups.
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Harrisburg is wasting heaps of money, and elected officials of all political persuasions should agree to quickly put a stop to it. (If you look at your letterhead and it begins with the phrase “The Honorable State Rep.,” we’re counting on you to take this matter seriously. Ditto for the state senators.)
In California, which boasts a state employee pension fund of $303 billion, efforts already have started to slash investment expenses. Officials plan over the next five years to decrease the number of firms and consultants on which they rely from 212 to about 100, according to a report last week in the Los Angeles Times.
It’s the second big, money-saving move for the nation’s largest state pension in less than a year. The California Public Employees’ Retirement System previously divested itself of hedge fund investments, which amounted to about $4 billion, and saved nearly $135 million in fees.
The Maryland Public Policy Institute, meanwhile, did research showing that state narrowly trailed its peers in pension fund performance over a 10-year period, yet paid nearly $300 million in management fees to private-equity and hedge fund managers, according to a policy analyst for the National Taxpayers Union Foundation. “The high cost of hedge fund management, combined with their lackluster returns in recent years, should prompt more states to reconsider how they allocate their pension investments,” the analyst concluded.
In Pennsylvania the pension pot for state workers amounts to about $72 billion. Certain observers warn that the under-funded investment programs intended to provide secure retirements for those individuals will — without intervention — run dry. Why, then, continue to funnel so much of the people’s money to pay investment fees and enrich financial firms?