Wall Street Wipe Out – New York's Pension Plan Hit Hard with Fees

Wall Street Wipe Out – New York's Pension Plan Hit Hard with Fees

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Wall Street Wipe Out – New York's Pension Plan Hit Hard with Fees

An article recently published in the New York Times highlighted the impact that fees had on the gains made by the New York City Pension Funds. An internal analysis conducted by the Comptroller of New York City, Scott M. Stringer, concluded that $2 Billion in fees have been incurred for the 10-year period ending December 2014 with a gross return of $2.5 Billion to show for it. Or, in the comptroller’s own words that the pension has “received virtually nothing in return.”

The double-whammy for the city of New York is that not only could have the city done better by hiring an index fund advisor and selecting and monitoring a portfolio of index funds, but they may have also created an even greater tax-burden for the citizens of New York who may have to make up the shortfall due to active management.  With the fiduciary responsibility entrusted to the trustees of the pension plan, their leadership has called into question the excessive fees paid to their active investing Wall Street "experts". “The fees are exorbitant and we’re not getting a good return on our money,” says Henry Garrido, executive director of District 37 and a trustee of the New York City Employees’ Retirement System. “That’s an insane process to do the same thing over and over again.”

Although calling into problem the fees paid is a tremendous step in the right direction, it does beg the question of whether or not the pension will abandon their efforts to actively manage their investments. In other words, are they just going to look for less costly active managers? For a $160 billion pension plan, odds are not stacked in their favor in having a favorable outcome (see our study of state pension plans: Pension-Gate). For every dollar contributed to actively managed investment strategy with the hopes of beating the market, there must be an equal dollar amount that is going to lose to the market. The higher the dollar amount dedicated to active investing, the harder it becomes overall to outperform the market because you become a bigger chunk of the overall market. And if you cannot match the 0.10-0.50% expense ratios of simple index fund portfolios, then you are virtually guaranteed to lose over the long run. Not to mention the fact that stock picking skill is indistinguishable from zero and continuing with active management as their choice of investment management is a mistake in itself. To Mr. Garrido, we would say, the insanity is not in the process; rather in the idea of active management in the first place.

At Index Fund Advisors we have often warned our investors of the Silent Partners responsible for the diminishment of market returns that are there for the taking. By minimizing the piece of the pie that goes to the active consultants and active managers, there is more for investors to take home for themselves. As Nobel Laureate William Sharpe reminds us, "Properly measured, the average actively managed dollar must underperform the average passively managed dollar, net of costs. Empirical analyses that appear to refute this principle are guilty of improper measurement.1"

The Feast


1 William F. Sharpe. "The Arithmetic of Active Management"