Wall Street Fees Wipe Out $2.5 Billion in NYC Pensions

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FrogPrince
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Wall Street Fees Wipe Out $2.5 Billion in NYC Pensions

Post by FrogPrince »

I guess they didn't read Bogleheads....

http://www.nytimes.com/2015/04/09/nyreg ... gains.html
The Wizard
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Re: Wall Street Fees Wipe Out $2.5 Billion in NYC Pensions

Post by The Wizard »

There are quite possibly kickbacks or other funny money games going on in these cases.
If you steer your large union pension fund to my management company, I'm sure we'll find some way to express our gratitude...
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friar1610
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Re: Wall Street Fees Wipe Out $2.5 Billion in NYC Pensions

Post by friar1610 »

Quite a few years ago I had the occasion to look more closely at the fees paid to companies managing the 403B plans for teachers, nurses, etc. I came away from that shocked at how much was ending up in the coffers of the insurance companies managing the annuities which form the basis of those pensions.
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Louis Winthorpe III
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Re: Wall Street Fees Wipe Out $2.5 Billion in NYC Pensions

Post by Louis Winthorpe III »

That strikes me as a strange article in multiple respects. First is the fact that the guy who led the study was a trustee for one of the pension funds that was allegedly screwed by Wall Street. If he's right, someone should sue him for breaching his fiduciary duty as a trustee. Second, it's not at all clear to me that anything improper happened here. Please bear with me before jumping on that statement because I'm open to being shown that I'm wrong, but I will need someone to explain what I'm missing.
Over the last 10 years, the return on those “public asset classes” has surpassed expectations by more than $2 billion, according to the comptroller’s analysis. But nearly all of that extra gain — about 97 percent — has been eaten up by management fees, leaving just $40 million for the retirees, it found.
It's unclear what is meant by saying the return on public asset classes "surpassed expectations" before fees. I take the entire quote to mean that the public asset classes returned, net of fees, exactly what was expected. That doesn't sound like a scandal to me.

That being said, if the fees were exorbitant, that's scandalous in and of itself. But it's not clear to me that they were. They paid $2B over 10 years on management fees, or $200M per year. This was on assets worth ~$130B (80% of $160B). I don't know what assumption to make regarding net change in AUM excluding investment returns because I don't know what is coming into the pension fund in the form of contributions or what is coming out of the funds to pay benefits. Excluding investment returns, the plans could either be shrinking or growing. Since I don't know, I'll assume the assets were flat except for investment returns.

Using the link below, I estimate that a 60/40 portfolio would have doubled over the past 10 years, so let's assume an average balance over the 10 years of ~$100B in assets (starting at $65B, ending at $130B).

https://www.portfoliovisualizer.com/bac ... entage=0.0

If they paid an average of $200M per year on $100B in publicly traded assets, that's 0.2%. That's certainly more than they needed to pay for index funds, but for active management or for some combination of active and passive management, it doesn't seem out of the realm of what's reasonable. It's certainly less attention-grabbing than a claim that Wall Street gobbled up $2B of pensioners' assets.

If you write a story saying that Wall Street charged some poor pensioners too much, everyone is going to agree, but I don't think the author did a good job of making the case here.
Seattlenative
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Re: Wall Street Fees Wipe Out $2.5 Billion in NYC Pensions

Post by Seattlenative »

The Wizard wrote:There are quite possibly kickbacks or other funny money games going on in these cases.
If you steer your large union pension fund to my management company, I'm sure we'll find some way to express our gratitude...
Unfortunately, I am inclined to concur.
user5027
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Re: Wall Street Fees Wipe Out $2.5 Billion in NYC Pensions

Post by user5027 »

20/20 hindsight - we should have been tilted with financials while they were hosing them. :greedy
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Taylor Larimore
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"NYC pension fees are a $2.5B lesson for investors"

Post by Taylor Larimore »

[Thread merged into here, see below. --admin LadyGeek]

Bogleheads:

This is an informative article about the importance of low costs. These are excerpts:
"Savvy investors know that paying high fees to brokers or fund managers can really eat into their portfolio’s returns. New York City just provided proof of how devastating those fees can be."

“When you do the math on what we pay Wall Street to actively manage our funds, it’s shocking to realize that fees have not only wiped out any benefit to the funds, but have in fact cost taxpayers billions of dollars in lost returns,”

"If you invested $10,000 in a fund that generated a 10 percent annual return and had annual operating expenses of 0.5 percent, after 20 years you’d wind up with $60,858. If the fund carried a higher annual expense of 1.5 percent, you’d end up with only $49,725 — a difference greater than the original sum you invested."

"The pension funds had in many cases been reporting the investment returns of stock and bond holdings before accounting for those heavy fees. The real performance of those investments could only be gleaned after reading the footnotes in quarterly statements."
NYC pension fees are a $2.5B lesson for investors

Best wishes
Taylor
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htdrag11
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Re: "NYC pension fees are a $2.5B lesson for investors"

Post by htdrag11 »

"There's a sucker born every minute."

Thanks for sharing.
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nedsaid
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Re: "NYC pension fees are a $2.5B lesson for investors"

Post by nedsaid »

Okay, let's do a little math here. $2.5 Billion divided by ten is $250 Million per year. Let's take the $250 Million and divide it by the $160 Billion value of the pension portfolios. I come up with .0015625. That is about one-sixth of one percent. There is something missing in the story. Even if you take into consideration of the growth of the portfolios over 10 years, you still have management fees that are a fraction of a percent.

Making generous assumptions, I could say the management fees are 0.3% a year. This is high by Vanguard standards but hardly highway robbery. It looks like the fees are more like 0.2% a year. The story talks about the effect of an extra 0.5% or 1.0% or 1.5% annual management fees on a portfolio but this isn't what the New York Pension Plans were paying. They were paying more like 0.2% a year, not 0.5% or 1.0% or 1.5%.

There is a good point to be made about excessive management fees. But this story seems to be a swing and a miss. Something is missing here.
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Re: Wall Street Fees Wipe Out $2.5 Billion in NYC Pensions

Post by LadyGeek »

FYI - I merged Taylor Larimore's thread into here, which is a different article on the same topic.

Frog Prince's article: Wall Street Fees Wipe Out $2.5 Billion in New York City Pension Gains ( NYTimes.com)

Taylor Larimore's article: NYC pension fees are a $2.5B lesson for investors (msn.com)
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Re: "NYC pension fees are a $2.5B lesson for investors"

Post by Louis Winthorpe III »

nedsaid wrote:Okay, let's do a little math here. $2.5 Billion divided by ten is $250 Million per year. Let's take the $250 Million and divide it by the $160 Billion value of the pension portfolios. I come up with .0015625. That is about one-sixth of one percent. There is something missing in the story. Even if you take into consideration of the growth of the portfolios over 10 years, you still have management fees that are a fraction of a percent.

Making generous assumptions, I could say the management fees are 0.3% a year. This is high by Vanguard standards but hardly highway robbery. It looks like the fees are more like 0.2% a year. The story talks about the effect of an extra 0.5% or 1.0% or 1.5% annual management fees on a portfolio but this isn't what the New York Pension Plans were paying. They were paying more like 0.2% a year, not 0.5% or 1.0% or 1.5%.

There is a good point to be made about excessive management fees. But this story seems to be a swing and a miss. Something is missing here.
Exactly my point above, and in fact, I came up with the same 0.2% fee assumption. I think you're absolutely right, and if we are both mistaken, I'd appreciate hearing why.
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nedsaid
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Re: Wall Street Fees Wipe Out $2.5 Billion in NYC Pensions

Post by nedsaid »

Louis, I will give you credit. Before the two threads were merged, I read your comments on the other thread. Your post certainly influenced my comments.

I wouldn't be unhappy with 0.2% management fees and a performance that beat the market by a tad. I would say that the New York Pension Funds have done a very acceptable job for their beneficiaries.
A fool and his money are good for business.
Code Commit
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Re: Wall Street Fees Wipe Out $2.5 Billion in NYC Pensions

Post by Code Commit »

Here is another opinion piece which actually calculates the numbers and shows that numbers are not that bad (over 10 years).

http://www.bloombergview.com/articles/2 ... arges-fees
cherijoh
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Re: Wall Street Fees Wipe Out $2.5 Billion in NYC Pensions

Post by cherijoh »

nedsaid wrote:Louis, I will give you credit. Before the two threads were merged, I read your comments on the other thread. Your post certainly influenced my comments.

I wouldn't be unhappy with 0.2% management fees and a performance that beat the market by a tad. I would say that the New York Pension Funds have done a very acceptable job for their beneficiaries.
While 0.2% isn't all that bad by retail standards, for institutional investors it is huge! My 401-k offers Vanguard Institutional Index Fund Institutional Plus Shares (VIIIX) with an expense ratio of 0.02%. That is a factor of 10 difference. :oops:

FYI, I also interpreted this to mean that these are the equivalent of the fund ER and does not include any administration fees that are added on top of that at the participant level.
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Re: Wall Street Fees Wipe Out $2.5 Billion in NYC Pensions

Post by Louis Winthorpe III »

Code Commit wrote:Here is another opinion piece which actually calculates the numbers and shows that numbers are not that bad (over 10 years).

http://www.bloombergview.com/articles/2 ... arges-fees
Good link. Thanks.
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Re: Wall Street Fees Wipe Out $2.5 Billion in NYC Pensions

Post by Louis Winthorpe III »

cherijoh wrote:
nedsaid wrote:Louis, I will give you credit. Before the two threads were merged, I read your comments on the other thread. Your post certainly influenced my comments.

I wouldn't be unhappy with 0.2% management fees and a performance that beat the market by a tad. I would say that the New York Pension Funds have done a very acceptable job for their beneficiaries.
While 0.2% isn't all that bad by retail standards, for institutional investors it is huge! My 401-k offers Vanguard Institutional Index Fund Institutional Plus Shares (VIIIX) with an expense ratio of 0.02%. That is a factor of 10 difference. :oops:

FYI, I also interpreted this to mean that these are the equivalent of the fund ER and does not include any administration fees that are added on top of that at the participant level.
You're comparing apples and oranges. The issue is what institutional investors would pay for active management. The article is certain that 0.2% is extortionate. It isn't. Out of curiosity, I asked what my megacorp employer pays active equity managers, and a typical fee structure involves tiers based on total assets under management, with 0.25% being typical for the lowest tier. (I also asked what we pay for passive management, and it's the same 0.02% your employer pays.)
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nedsaid
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Re: Wall Street Fees Wipe Out $2.5 Billion in NYC Pensions

Post by nedsaid »

cherijoh wrote:
nedsaid wrote:Louis, I will give you credit. Before the two threads were merged, I read your comments on the other thread. Your post certainly influenced my comments.

I wouldn't be unhappy with 0.2% management fees and a performance that beat the market by a tad. I would say that the New York Pension Funds have done a very acceptable job for their beneficiaries.
While 0.2% isn't all that bad by retail standards, for institutional investors it is huge! My 401-k offers Vanguard Institutional Index Fund Institutional Plus Shares (VIIIX) with an expense ratio of 0.02%. That is a factor of 10 difference. :oops:

FYI, I also interpreted this to mean that these are the equivalent of the fund ER and does not include any administration fees that are added on top of that at the participant level.
The article didn't say that the New York Pension Funds were indexed. New York was paying for active management. And yes, I do own shares of the same Vanguard Institutional Index Plus shares fund that you do. I am aware of institutional rates for managed and passive funds. Most often, institutional rates for fund management exceeds 0.20%.

The article seemed to imply that the New York Pension Funds were paying 0.5%, 1.0%, or 1.5% rates for management when in fact they were paying more like 0.2%. The article implied that the Pension beneficiaries were getting ripped off when in fact the fees they were paying were very reasonable.

Could the fees be lower? Yes. Could NY index all their pension fund investments? Yes. The article didn't provide the evidence to back the assertions it made.
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Re: Wall Street Fees Wipe Out $2.5 Billion in NYC Pensions

Post by sawhorse »

I was expecting something like 1.5% fees. But the expense ratios are actually good. Really good. It's effective click bait to point out that it's $2.5 billion, but 0.2% of a really large amount is inevitably a really large amount itself.

It doesn't sound like the plan managers were trying to rip them off, and it sounds like the employer did take fees into consideration. I don't see what the fuss is about.

This is from the msn.com article. Emphases mine.
Paying even an extra 1 percent a year can really add up over time. Here’s an example from the Securities and Exchange Commission: If you invested $10,000 in a fund that generated a 10 percent annual return and had annual operating expenses of 0.5 percent, after 20 years you’d wind up with $60,858. If the fund carried a higher annual expense of 1.5 percent, you’d end up with only $49,725 — a difference greater than the original sum you invested.
If a fund generated 10% annual returns for 20 years, I would be willing to pay a hell of a lot more than 1.5% :?
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