Hiring Wall Street companies or consultants for public pension plans hasn't done much for outcomes, according to the Maryland Policy Report, a study by the Maryland Public Policy Institute and Maryland Tax Education Foundation.
In attempting to figure out how much money Maryland’s pension system had spent on Wall Street fees and how that compared to public pension systems in all 50 states, the two organizations sifted through every available annual report. It compared the ratio of state pension system Wall Street fees to their net assets and compared those ratios to Maryland and other states.
What it found is that Maryland’s Wall Street fee ratio was .693 compared to the U.S. average of .409 and the U.S. median of .359.
The Maryland State Retirement and Pension System had net assets of $37.6 billion as of June 30, 2011, which were principally publicly traded stocks and bonds. During the fiscal year ending June 30, 2011, the system spent $221 million on Wall Street money management fees, though fund management appears to have yielded subpar results, the report found.
“For many state pension funds, investment results over the last 10 years have failed to hit target returns of 7 to 8 percent annually. This has prompted Maryland’s System and other state systems to make large commitments to ‘alternative investments,’ like leveraged buyout funds and hedge funds, with the hope of obtaining higher returns than conventional public stocks and bonds,” according to the research.
In 2011, 25 percent of Maryland System’s investment portfolio was in alternative investments, including private equity and real estate.
The 50 systems had total assets of more than $2 trillion and in 2011, they spent more than $7.8 billion in Wall Street fees, “despite the lack of evidence that active management provides higher investment returns,” the report stated.
During its research, the system found that Missouri, Pennsylvania, Hawaii, Oregon and Indiana pay higher fee ratios than Maryland, but Virginia, North Dakota, Louisiana and Alaska also are in the Top 10 list for highest Wall Street fee ratios.
The Maryland System spent more on fees, relative to its assets, than 45 other state systems. Among systems with publicly available financial reports from fiscal 2011, Maryland comes in at third place behind Missouri and Oregon, the report found.
According to the Maryland Policy Report, above-average Wall Street fees might be justified by above-average returns, but Maryland’s system has lagged behind other state systems in this regard.
In testimony before the State Senate Finance Committee in 2012, the organizations pointed out that Maryland’s System underperforms others by about 1 percent per year. This shortfall translates into about $3 billion in lost income over the last 10 years.
Authors of the policy report believe the Maryland pension systems would be better off indexing their portfolios to ensure average investment returns. They claim it would be a safer and more responsible use of system resources than paying Wall Street management firms millions each year to deliver subpar results on public stocks and bonds and risky private alternative investments.