Pension funds find less luck in risky choices

Not unlike the moment of clarity many 401(k) participants will soon discover as their fees - and the occasional shortcoming - of their investment accounts are laid out in full detail, many public pension plans are also learning that their own investments in risky prospects don't always yield the safe returns that were hoped for.

In a recent New York Times article, it seems that public workers' funds that have made significant investments in private equity, real estate and hedge funds have not quite produced the anticipated results ... other than increased fees.

The contrasts can be quite stark, as the story explains. The risk-taking Pennsylvania State Employees' Retirement System, valued at $26.3 billion, placed almost half of its assets in private equity and venture capital funds.

It paid $1.35 billion in management fees over the last five years and generated a return of just 3.6 percent, significantly less than what it needs to meet financing requirements (or even keep up with the 4.9 percent return that's standard among similar systems. 

Meanwhile, Georgia's state retirement system, valued at $14.4 billion, is prohibited by state law from using alternative investments, garnering a decent 5.3 percent return and paying just $54 million in fees.

Making a move to try to capture better returns in a world of low-yield Treasury notes and bonds is a significant trend, as well. Statistics show an almost 10 percent jump since 2007 in the level of investment in hedge funds and private equity on the part of retirement plans with more than $1 billion in assets.

California's troubled state system, with a $135.7 billion liability, also faces significantly higher costs - and relatively low returns - based on the hedge funds and private investments it has purchased.


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