The Maryland Public Policy Institute
MPPI IN THE NEWS
The Ultimate Irony: Public Employee Unions Are Indirectly Some of Wall Street's Biggest Customers
- $8 billion in Fees Support Thousands of Wall Street Bonuses
- Evidence Shows Wall Street Managers Can't Beat Market Averages – so the $8 Billion in Fees are Going to Waste
- Indexing Portfolios Could Save $$ and Provide Average Results
- Indexing Could Cut States' Unfunded Liabilities by $100 Billion
- Pension Funds Support Public Union Employees' Retirement
ROCKVILLE, Md., Aug. 3, 2012 /PRNewswire-USNewswire/ -- Fifty state pension funds recorded over $2 trillion in assets in 2011, with the preponderance of assets being publicly traded stocks and bonds. They spent $7.8 billion on Wall Street money management fees, despite substantial evidence that Wall Street managers are unable to beat passive equity index funds that cost much less. The pension funds represent some of Wall Street's largest customers.
During calendar 2011, 84% of actively managed US equity funds underperformed their benchmarks, according to S&P Indices, a division of McGraw Hill. Morningstar, the leading mutual fund rating firm, reported similar results for its equity fund universe for 2011. Such underperformance is a consistent problem over time, according to both companies. A 2011 study from Vanguard shows similar underperformance from actively managed fixed income mutual funds vs. the 2010 Barclays Capital Aggregate U.S. Bond Index.
State Retirement Systems
Public pension systems administer retirement benefits for millions of public employees across the nation. According to a 2010 Census Bureau survey, there were over 3,400 state and local public employee retirement systems in the United States, comprised of over 14.6 million active contributing members.
The vast majority of public pension systems in the United States contract with Wall Street firms to select the publicly traded stocks and bonds that make up the bulk of their investment portfolios. The firms' typical 'sales pitch' to a pension fund is that the Wall Street firm can 'outperform' a given section of the stock or bond market; therefore, the pension fund should pay the Wall Street firm a fee for the firm's stock (or bond) picking prowess. To varying degrees, pension fund employees monitor the Wall Street firms, usually with moderate assistance from other Wall Street type companies called 'investment consultants.'
For this report, the Maryland Public Policy Institute (MPPI) and the Maryland Tax Education Foundation (MTEF) reviewed the comprehensive annual financial reports of major statewide pension funds from all 50 states. The study can be downloaded: