Tuesday, September 24, 2019

Bigger Pie Forum: Mississippi Overpays on PERS Management Fees


Mississippi’s defined benefit pension fund, the Public Employees’ Retirement System of Mississippi (PERS), has enjoyed above average returns on the plan’s investments in recent years.


In the last decade, PERS investments have averaged a return of 6.38 percent. The plan’s expected rate of return is 7.75 percent.

These investment returns are important because they allow PERS, which covers most state, county and municipal employees in Mississippi, to expand its bottom line to ensure it can pay benefits to retirees while ensuring the plan will be able to do so when contributing employees join the ranks of the retired.

Right now, PERS is only 62.5 fully funded. The plan’s funding ratio — which is defined as the share of future obligations covered by current assets and provides a useful snapshot for gauging the health of a pension fund — was 88 percent funded as recently as 2001.

Like most pension funds, the PERS plan pays a fee to investment managers to help the plan realize maximum earnings potential. Since 2009, PERS has paid more than $647 million in fees to outside money managers.

PERS investments in the stock market, bonds and real estate returned $2.4 billion, or about 9.48 percent for year ending 6/30/2018 and it paid more than $103 million to outside investment firms in fees and trading costs.

A 2018 study by North Carolina State University says that state pension funds have paid billions in fees to private investment firms for active management of assets. The study found that the plans would have smaller unfunded liabilities and similar investment results if they simply put their money in conventional index funds rather than paying fees to money managers.

The study also found no relationship between better performance and higher fees paid by pension funds to investment firms.

Here are some other states from which observations can be drawn:

Alabama

Alabama’s Retirement Systems of Alabama (RSA) is managed differently than Mississippi’s. While the plan has investments, it also owns golf courses statewide (the Robert Trent Jones Golf Trail), large office buildings (known as RSA towers located in Mobile and Montgomery), hotels and a media company, Community Newspaper Holdings. It sold most of its interest in Raycom Media, which owns several Mississippi TV stations such WLBT-TV and WDAM-TV, in 2018.

The RSA largely doesn’t use outside managers to run its investments and the costs to administer its investments are much lower than Mississippi’s, averaging about $5 million per year. The RSA spends about 0.24 percent, on average, on investment administrative expenses, the least among its Southeastern neighbors.

The plan has a much higher estimated rate of return than Mississippi’s at eight percent. PERS once had a similar expectation, but its governing board has lowered that standard twice.

The RSA has three separate plans under its stewardship — one for teachers, one for state employees and the other for judges — and the combined investment income on the plans has averaged about $1.5 billion per year over the past decade.

According to data from the Pew Research Center, Alabama’s pension system isn’t in the best of shape, considering it has a 67 percent funding ratio, not much better than Mississippi’s.

Arkansas

Arkansas is the closest match to Mississippi in terms of population (both states hover around three million people), but its pension fund is in much better shape. The Arkansas Public Employees Retirement System is much better shape financially, according to its latest financial report, with a funding ratio of 79 percent.

The plan also assumes an annual rate of return on its investments of 7.15 percent, lower than Mississippi’s (7.75 percent). Arkansas pays its money managers about $27 million, on average, over the last decade.

The Arkansas pension system has averaged over the last decade an annualized return of 5.96 percent.

Tennessee

Tennessee also has a smaller expected rate of return, 7.25 percent, than Mississippi. Like Arkansas, the Tennessee pension system is in much better shape than PERS of Mississippi. The three parts of the pension system — state employees, K-12 teachers and county and municipal employees — are at 88.88 percent, 101.8 percent and 99.61 percent respectively.

Tennessee spends a lower percentage of its investment returns on paying its money managers than either Mississippi or Arkansas.

Conclusions

Comparing PERS of Mississippi with three of its neighbors, the state’s rate of return on its investments compares favorably, but the amount paid to the plan’s money managers has been on the increase over the decade.

Only one of the examined plans, Alabama’s, has an expected rate of return on investments that exceed Mississippi’s benchmark. The PERS board has cut the expected rate of return twice in the past decade, but needs to look at doing so again to ensure that the plan’s future projections aren’t overly optimistic.

The PERS board should examine what Tennessee’s system is doing, considering that their rates of return are similar with a smaller cut paid to the investment managers who helped grow the plan’s investments.

There’s also the matter of going internal with the plan’s investments and utilizing conventional index funds as suggested by the study from North Carolina State University. Doing so might help the plan’s finances by keeping more of the returns in the system.

Bigger Pie Forum authored and sponsored this post. 

18 comments:

Anonymous said...

Warren Buffet has proven that these high dollar managed funds don't do as well as a index fund.

Like most things in Mississippi the contracts, management fees, bond fees, attorney fees, etc. that are paid by the state agencies are not based on what is best for the tax payer but what is best for the politically connected donors of our political puppets in this state.

MS probably is no exception as I am sure this goes on everywhere. It just gets old paying top dollar for poor service.

Anonymous said...

Everyone in the brokerage biz in Jax knows brokers that get fees from PERS for really adding nothing to the mix.

Anonymous said...

PERS participants...where ya at? Y’all are so quick to post about that 13th check. Any comment on more than half a billion in fees over 10 years?

We’ll wait.

DWF said...

I've said numerous times, that they could pay a couple of people a very nice salary from one of the management firms to run the portfolios without paying all these "management fees" to people just to be wooed and wined and dined.

Everyone said...

No shit!

Anonymous said...

Someone send PERS a copy of A Random Walk Down Wallstreet. I wonder if institutions can invest passively in index funds.

Anonymous said...

Which elected official is responsible for deciding how these funds are invested and which investment firm does it? The light of transparency should be shined on them. For the results, the fees seem pretty fat, 4.29% of the profits if my math is correct. If I were doing it, I would put 1/2 in the index funds and the rest where it is and see how the managed results stacks up to the index fund after fees are considered. If you did it that way at least you'd be half right which is better than all wrong.

Anonymous said...

Just invest it in the S&P500 and be done with it.

Anonymous said...

VTSAX - 0.04% expense ratio - place 30% of assets
VBTLX - 0.05% expense ratio - place 70% of assets
7.56 CAGR since 1986 and only 3 years of negative returns since 1986

Voila! I just got the state the 7.5% it desired and saved it 90 million in management fees.

Anonymous said...

$100 million per year compounded over 30 years would just about fix the under-funded status of the plan.

And yes, who is ultimately responsible? One suggestion, check the campaign finance reports.

Anonymous said...

Here's an idea. Take the annual report of the Alabama or Tennessee PERS and just copy what they did. For free.

Anonymous said...

Who hires these firms you ask?

The PERS Board, of course.

Who is the PERS Board, you ask?

Well, Charlie's angel, the State Treasurer; one appointee of the Governor, and nine people elected by ---- hold it, wait ---- the beneficiaries or future beneficiaries of the plan.

How could you design a better system to screw the taxpayers?

Anonymous said...

10:41 - It's not PERS participants you see plastering 13th check posts against the wall. It's you yappers who don't know shit about it to begin with. Where yat, indeed. 98% of us, just like you, don't know anything about the fees paid to money managers.

Anonymous said...

5:50 they are screwing themselves bybpaying all these fees. The pers board does not set finding formulas, the legislature does. The board just oversees the investments. Legislature should demand better. Or revamp the board.

Anonymous said...

5:35,

That's where you're wrong. I'm in retirement planning. And I know that over $500,000,000 in fees for an institutional investor is only acceptable when it's a publicly-funded plan. The private sector would want charges filed.

Anonymous said...

So Mississippi paid 103,000,000 in fees just in 2018 alone, and it has paid 647,000,000 in fees over the past 10 years or roughly 64,700,000 a year in fees.

But Alabama only pays 5,000,000 a year in fees, and Arkansas only pays 27,000,000 in fees a year.

Good Lord, Mississippi is getting robbed. We're paying between 98,000,000-76,000,000 (or assuming only 64,700,000 in avg yearly fees, we're overpaying between 59,000,000-37,000,000 a year) in fees that wouldn't be paid and aren't being paid by any other state around us.

Hey PERS, you ever thought about hiring the folks that manage Alabama's or Arkansas' plans ? The people you have hired are screwing you/us big time.

Anonymous said...

The headline refers to expense ratios. But the article refers to dollar amounts that have many zeros. Expense ratios are easy to compare. Dollar amounts are not as clear. Why not refer to expense ratios? Bigger Pie usually provides clearer communications. this falls below their usual standard.

TWO SMART GUYS said...

Two Smart Guys

For anyone that missed our debate with a money manger in the post "Retirees Smear JJ" we modeled the exact scenario that Bigger Pie Forum has brought to light. We commend their efforts.

https://kingfish1935.blogspot.com/2019/08/retirees-smear-jj.html

We argue that PERS would have been much better off over the last decade without active fund managers. Possibly to the tune of +$3B (Billion) in assets. We used a passively managed Vanguard Balanced Index Fund (VBAIX) as an example. Ultimately we argue that hundreds of millions of dollars are being wasted on the services of over 40 money managers. We argue that PERS should get rid of all money managers and move assets into passively managed funds with no overlap. Money managers claim they provide value in mitigating losses during market downturns. Let's take a look at that:

PERS lost 19.4% during the 2008-09 fiscal year (recession), during this same period VBAIX only dropped 13.14%. PERS (managed by "professionals") LOST 6.26% more than VBAIX during the same period. Someone said Tate Reeves was the "money guy", he was certainly on the PERS Board during this period. Tate Reeves (currently running for Governor) was on the PERS Board during this period of underperformance, which continues under current leadership. We would advocate a financial literacy test as a qualification to become a board member.

Money managers claim to be able to do something magical for investors to prevent losses during market downturns. PERS had dozens of these people managing money during FY2009 and still managed to underperform VBAIX by 6.26%. This is precisely the time when the money managers should be able to provide the value they claim to provide. When you are dealing with $20-$30B (Billion) these percentages are tremendous. An even larger problem is that they also significantly underperformed the market during the subsequent recovery as well, likely to the tune of $3B (Billion). Bad management in both directions...


Listed below are the FY2009 values with quarterly dividend reinvested, and subsequent calculated return for:
VBAIX (Vanguard Balanced Index Fund 60/40, Institutional)
---------------------------
7/01/2008: Open $20.39
09/25/2008: $19.62 Dividend: $0.149 Dividend% 0.76
12/26/2008: $16.24 Dividend: $0.163 Dividend% 1.00
03/26/2009: $15.88 Dividend: $0.137 Dividend% 0.86
06/25/2009: $17.02 Dividend: $0.122 Dividend% 0.72
06/30/2009: Close $17.03
---------------------------
16.48% (minus yield of 3.34%), a loss of 13.14% as compared to a PERS loss of 19.4%

Greater savings can be achieved by PERS manually maintaining a 60/40 balance using Vanguard Total Bond Market Institutional Plus fund (VSMPX) at 0.02% expense ratio and Vanguard Total Bond Market Institutional Plus fund at 0.03% expense ratio. The use of these two funds with minimal management effort are estimated to save PERS approximately $100,000,000 (one hundred million) per year in management fees.

An argument was made that it is too risky to place $28.2B (Billion) in one financial institution (Vanguard). Our response is that Vanguard has $5.3T (Trillion) in assets under management. We would trust it a bit more than the assortment of 50 advisers handling PERS assets. However, an alternative option is to place half in Fidelity index funds, or distribute a third to Blackrock index funds using identical holdings across institutions.

The current PERS investment model can only be supported by growing the employee base (contributing to PERS) and/or increasing employer contributions. With advances in automation on the horizon growing the employee base is unlikely and would also be politically unpopular.

Two Smart Guys recommends that PERS stake holders take control of what belongs to you. Make the appropriate changes to stop financial waste and add longevity to the PERS balance sheet. Promptly making these changes would likely produce a model retirement system over several decades.

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