Published on January 23rd, 2013 | by Len Lazarick4
State pension system pays too much to advisors, think tanks assert; retirement officials disagree
Two of Maryland’s free-market think tanks are again attacking the Maryland pension system for spending too much money on investment advisors who are not producing enough returns. But the State Retirement Agency says the advisors have helped it reach its benchmark investment goals.
The Maryland Public Policy Institute and the Maryland Tax Education Foundation issued a report Tuesday saying the retirement system spent $229 million on “Wall Street money managers” for the fiscal year that ended in June 2012.
The fees exceeded the fund’s investment income by more than $100 million, the think tanks said. For fiscal 2012, the $37 billion fund’s investment return was 0.36%, substantially lower than the 50-state median of 1.15% reported by consulting firm Wilshire Associates.
Maryland underperforms, think tank claims
“Maryland’s pension fund continues to underperform its peers at the expense of taxpayers and the system’s 350,000 members,” said Jeff Hooke, the MTEF chairman and longtime investment banker. “Despite the trustees’ best efforts, the fund’s sizable commitment to hedge funds and private equity hasn’t worked out. As we have noted in previous studies, Maryland’s pension system could save enormous amounts of money on fees without harming investment returns by simply embracing low-cost, passively managed index fund investments.”
But Robert Burd, the agency’s deputy chief investment officer, said the plan’s total earnings as of Dec. 31 were 12.94%, a point and half more than its benchmark of 11.51%, according to a report from State Street Investment Analytics. The plan’s investment portfolio now totals $39.3 billion, the report said.
“Active management has made us money,” Burd said. “We have added value over our benchmarks.”
Done well on private equity
“We cannot passively invest in all asset classes,” Burd said, in particular private equities — stock in companies not sold on public exchanges. “We’ve done very well on private equity,” earning 13% last year and 11% over the past 10 years.
“For someone to say that active management has not worked for us is totally wrong,” said Burd.
“The fees we pay our asset classes are below average,” Burd said, as shown by 2011 report by Greenwich Associates.
Due to time lag in reporting by various states, only fiscal 2011 figures are comparable across the country.
“The investment earnings lost to overpaid money managers could have helped solidify the pension fund’s financial condition,” said Christopher Summers, president of the Maryland Public Policy Institute. “Instead, the state is subsidizing Park Avenue penthouses and Palm Beach getaways. Maryland’s retired state employees and taxpayers deserve a simpler, more effective investment strategy for their retirement savings.”
Retirement agency spokesman Michael Golden noted that only a small portion of the pensions system’s investment advisors are based in New York, despite Summers’ overblown rhetoric.