Showing posts with label transparency. Show all posts
Showing posts with label transparency. Show all posts

Pension Plan Investment Fees

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In the Wall Street Journal 5/14-15,2016 Cross Country article by Marc Levine states 33 state pension systems spent $6 billion on Asset Management fees in 2014, according to a 2015 study by Maryland Public Policy Institute. The 10 states that spent the most on fees- including New Jersey, Maryland, South Carolina, and Missouri-achieved a rate of return no higher than the states that spent the least. It doesn't state the amount spent by Missouri, but how can this be justified?
Thank you for the Rumor Central question. We spend time reviewing the various analysis of public pension plan investments. In this vein, we saw the report published by the Maryland Public Policy Institute (MPPI) and the article in the Wall Street Journal (WSJ) based on the MPPI analysis. We believe that the MPPI contains material misstatements that we would like to address.

For instance, the WSJ article says “…Missouri…achieved a rate of return no higher than the states that spent the least.” This analysis was based on a 5-year rate of return ending 6/30/2014. In reality, MOSERS returned 13.2% (net of all fees and expenses) for the 5-year-period ending 6/30/14 vs. the median return of 12.7% for the “Bottom 10 Wall Street Fee Ratio States” as highlighted in the 2015 MPPI study. In other words, after all fees and expenses were paid, MOSERS still outperformed the 5-year median return reported for the 10 cheapest fee states. This simply says that we have outperformed the lower fee plans over the same 5-year period; contrary to the conclusions they have written. In our investigation, we could not discern where the MPPI research and WSJ article found their return information.

Additionally, MOSERS has a long-standing, national reputation for consistently disclosing all management and incentive fees associated with its external investment managers. Unfortunately, not all public pension plans adhere to the same philosophy of transparency and thoroughness as MOSERS. MOSERS has made a practice of full fee disclosure since 2002. As a matter of fact, Pew Institute recently issued a report that recognized MOSERS’ fee reporting standard as among the highest in the pension industry. However, when this disclosure difference is not accounted for, it makes the Maryland Public Policy Institute’s findings incomplete and misleading.

Inconsistent and opaque fee reporting activities make it difficult to compare pension plan fee structures in an “apples to apples” manner, especially the incentives paid to external investment managers, which many plans don’t disclose at all. This wide disparity in disclosure makes many pension plans appear to have lower fees relative to MOSERS when, in actuality, our fees may be comparable. For example, there are several funds in the MPPI analysis that, like MOSERS, invest a significant portion of their assets in alternative investments. 

Alternative investments, generally, are associated with high management fees and a share of the profit generated. The fact that these other funds share similar size allocations to these high-fee areas, but the analysis implies MOSERS has dramatically higher fees is misleading. The truth is, as discussed in the Pew Report, those funds aren’t disclosing a significant portion of their fees in their annual reports. If MPPI had the correct fee information, we believe it would have changed their conclusion as it relates to MOSERS.

In reference to the Wall Street Journal’s political “mischief” findings, it’s important to note that, while a number of MOSERS’ trustees do hold political office, our board is not responsible for day-to-day investment decisions. Instead, investment decisions are made by a dedicated, professional investment staff with the aid of independent consultants where necessary. The investment program at MOSERS is guided by a comprehensive set of investment beliefs that are aligned with MOSERS’ overall portfolio objectives. Fees are a critical risk consideration when it comes to future investment results and weigh heavily in the criteria established to make investments. However, fees are but one of the many variables investment staff considers when evaluating a possible investment. 

Thank you again for the question and your interest in MOSERS' investment activity. As a retired member of the system and recipient of a monthly benefit payment, we wholeheartedly understand your reservations when reading an article like this one. Rest assured that MOSERS is making every effort to minimize fees where possible and will continue to adhere to its guiding principles of preserving the long-term corpus of the fund, maximizing total return within prudent risk parameters, and acting in the exclusive interest of the members of the system.
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