Financial Elite Scamming the People Out of Their Hard-earned Wages by Charging High Fees for Pension Plans and 401(k) Accounts

Politicians support generous compensation packages for public sector employees to pander for their votes but also to further enrich the fat cat bankers. The pension pot grows with every public sector wage increase (and with every new employee added to the public payroll). It is all based on percentages, so the higher the wages (and the more people on the public payroll), the more money for Wall Street. In other words, if the hedge fund or private equity fund charges 10 percent to manage a public pension fund, it makes more money if the fund is $500 million versus $100 million. So government cronies keep increasing pubic sector wages beyond what their counterparts in the private sector make, all while forcing the taxpayers to fund the majority of their pensions. The fat cats are getting even fatter off the backs of the working man in the private sector, whose standard of living is declining because he is the one making all the sacrifices.

Federal workers get a 401k-style plan, but they also get an old-fashioned defined-benefit pension plan with inflation protection. They also get health care benefits when they retire above and beyond Medicare. You just don't see that kind of stuff in the private sector anymore, and I think the federal work force ought to reflect the private work force. It shouldn't be an elite island separated from the rest of us.

For example, a federal employee contributes only 0.8 percent of their pay toward the Federal Employees Retirement System (FERS), while taxpayers put in 4.8 percent per employee (this is exclusive of the 6.2 percent Social Security tax paid by each federal employee, which is matched by taxpayers). FERS is a three-part retirement system consisting of Social Security coverage, a defined-benefit pension, and the Thrift Savings Plan (TSP), which is similar to 401(k)s offered to employees in the private sector. All federal employees under FERS automatically are enrolled in TSP. Even for those federal employees who elect not to contribute toward TSP, taxpayers are forced to contribute one percent of the employee's basic pay to TSP. For federal employees who elect to participates in TSP, taxpayers match their contributions on the first 5% of pay (the first 3% of pay is matched dollar-for-dollar; the next 2% is matched at 50 cents on the dollar; contributions above 5% are not matched). That is a boatload of money for Wall Street to profit on by charging management fees based on a percentage of fund total.

Some states have moved to, or are considering moving to, a 401(k)-style retirement plan for the public pension systems, along with other reforms for public sector employees. For example, Oklahoma's governor in 2011 signed a pension reform law, signaling the beginning of the end of years of piled-up pension responsibilities due in no small part to governmental inaction. The Oklahoma reforms include increasing the retirement age for many of those in the systems and forbidding lawmakers from offering cost-of-living increases without identifying a funding source. Also in 2011, Wisconsin's governor signed a pension reform law, ending collective bargaining for most public employees and requiring most state and local government employees to pay a larger share of the cost of their pension and health benefits, which is typical for workers in the private sector. For years in the Wisconsin system, state and local taxpayers paid not only the employer share of public pension contributions but, primarily due to collective bargaining, paid essentially all of the public employee contributions. The new Wisconsin law requires that for most public employees, pension contributions be split equally between employees and taxpayers (the pension costs didn't disappear; rather, they were transferred from taxpayers as a whole to the public employees paying their fair share).

Policymakers must remain vigilant in not rolling back the reforms and letting the pensions again become victims of shifting political winds. Oklahoma's governor said he'll recommend more changes in the future to modernize the pension systems, but that effort absolutely depends on future legislatures showing the same sort of leadership as this one.

PhillyDeals: Public pension plans pay hedge-fund fees with little gain

October 6, 2014

Philly.com - Struggling to raise cash for future pensions without bigger taxpayer bailouts, state workers' and teachers' retirement plans in the last dozen years or so have sought higher returns by betting on "alternative" investments not traded on public markets: hedge funds, real estate, private equity.

Hedge-fund managers have collected billions in fees, but their returns have mostly trailed stocks in recent years. The largest U.S. pension plan, the California Public Employees Retirement System, plans to dump its $4 billion hedge-fund portfolio, citing "complexity, cost," and the difficulty of buying enough good ones.

Hedge funds were supposed to make money even when stocks didn't, but they lost money when stocks went down in 2008.

Nicholas Maiale, who chaired the Pennsylvania State Employees' Retirement System (SERS) when it started buying hedge funds in 2002, says he has "soured" on the class. (Maiale feels better about private-equity funds, whose values rose with stocks in the recent bull market.)

It is tough for civilians to track what the state is getting from these high-fee investments. Unlike with stock and bond managers, pension plans don't post each alternative manager's yearly performance. Aggregate results for alternative-asset portfolios include managers' estimates of what their investments might be worth some day.

It's also hard to track the fees that managers collect, says Pennsylvania Auditor General Eugene DePasquale, who wants SERS and the Public School Employees' Retirement System (PSERS) to disclose more about their $7 billion in hedge funds.

"This is public money. This needs to be transparent," DePasquale told me. "It is very difficult to find out, through their own reporting, what the actual fee structures are."

"There is no uniform reporting" for state pension assets, Evelyn Williams, spokeswoman for PSERS, told me. "It is nearly impossible to compare the value of fees paid among various pension funds."

SERS, for example, signed an agreement with the hedge-fund manager Tiger Keystone Partners to prevent "the economic terms of this Agreement and any sensitive investment or financial information from public disclosure," when it invested $250 million in Tiger in 2012.

In its annual "Investment Program Expenses & Fees" report to state legislators, SERS does not list any fees paid to Tiger, even though a consultant report, circulated to the pension's board members but not published, lists "management fees" totaling $5.5 million and "incentive fees" totaling $5.7 million as paid to Tiger in 2012 and 2013. SERS staff declined comment on the consultant report.

PSERS reports some but not all the fees its alternative managers collect. Private-equity and hedge-fund managers are typically paid annual management fees of up to 2 percent of the money they invest, plus 20 percent of the investment's profits above a basic target. Fund managers call that 20 percent they collect "carried interest," and cherish it, since the government taxes it as capital gains, at lower rates than other income.

Hedge-fund managers typically collect carried interest each year. PSERS reports their carried interest along with management fees. But private-equity managers tend to let carried interest mount until their funds are liquidated years later; PSERS doesn't report what those managers collect.

New Jersey, similarly, does "not include carried interest earned by private equity and real estate managers," in reporting pension manager fees, state Treasury spokesman Christopher Santarelli told me.

Why should citizens care if pro investors get rich, as long as the pension plan does all right?

Americans have long worried that people who make fortunes from public contracts may influence how government does business. Congress in 2010 banned money managers from collecting fees from states and towns where they donated cash to politicians. The ban doesn't apply to donations to national political committees or candidates for Congress. Indeed, so many money managers give to national campaigns that "it would basically shut down the alternative portfolio if we were to go in that direction," Christopher McDonough, director of the New Jersey Division of Investment, told a state investment council meeting in September, according to my Inquirer colleague Andrew Seidman.

At the very least, we should know what we're paying them.