Retirees Are Handing Wall Street Billions For No Good Reason
Perhaps the best reason to worry about Wall Street money managers ripping off investors is that most of those investors are regular people—via retirement plans. The extent of the Wall Street skim is truly shocking.
A new research paper from a Duke University economist focuses on the North Carolina State Employees’ Pension Fund—the $90 billion fund that invests and manages the retirement money of the state’s teachers, firemen, and other governmental employees. These sorts of pension funds invest their money in a wide array of assets, including expensive private equity funds and hedge funds and other Wall Street vehicles that charge high fees in exchange for the (false) promise of enhanced performance and lower risk. When we speak of Wall Street investment managers overcharging customers and giving them nothing in return, we are not just talking about zillionaires picking the wrong hedge fund manager; we are talking about teachers and other thoroughly middle-class people who have worked for decades, and whose retirement money is being systematically plundered by Wall Street fees, thanks to bad pension fund management.
The new study of the fund did something very simple: it asked what would happen if North Carolina’s pension fund, instead of investing in a wide variety of of pricey funds, put all its money into a handful of simple, low-cost index funds, like the ones that anyone can buy through Vanguard. It is widely accepted that buying and holding low-cost index funds will save individual investors a great amount of money in the long run. But people who regard themselves as financially “sophisticated” often scoff at the idea of managing, say, a $90 billion pension fund according to the same principles that a normal person would manage their own tiny investments.
As is often the case, it is dangerous to listen to the sophisticated financiers. The study concluded that the state could be saving hundreds of million or billions of dollars per year by investing in simple Vanguard funds. Bolding ours:
Our various calculations... indicate indexing the equity part of the NC Pension fund would have increased returns by approximately $781 million per year (in the 3 years ending mid- 2015), $2.492 billion per year (last 5 years to mid-2015), and $969 million per year (last 10 years to mid- 2015). This is an increase in the return by between 0.87 percentage points/year and 2.78 percentage points/year.
The most conservative of these estimates translates into a saving of 3.59% of the annual NC State Budget or $82 per capita saving for each North Carolina Resident. Should the savings be allocated to raising teachers’ salaries, the saving would amount to $8,031 per teacher per year, which would be a 18.14 % salary increase. These are annual figures. The gain of $781 million per year translates into $7.810 billion over a decade. The likely growth of the pension plan makes this figure a slight underestimate.
An extra data point that you can include in your next discussion with some asshole who “works in finance” is that the study found that the fund managers actually do the opposite of “buy low, sell high”—namely, “managers adjust their asset holdings in the wrong direction, shrinking the allocation to asset classes just before they appreciate.”
Which is to say, these professional money managers actively made the investments worse than they would have been if you just let them alone and did nothing, ever.
At minimum, professional money managers are taking $800 million dollars per year away from middle-class residents of North Carolina, in exchange for nothing. This is only one state. “Pension reform” is a boring phrase, but there is a multibillion-dollar universe of Wall Street ripoffs out there that are completely legal, because no one is angry enough about it. Yet.
[The old people represent retirees getting robbed by inefficient investing and the child represents a hopeful future in which pension funds are primarily indexed: Flickr]