WRAL Investigates

Outside managers mean higher fees for N.C.'s pension fund

Posted April 26, 2010

— For 820,000 public workers and retirees, the North Carolina pension fund represents their financial future.

State Treasurer Janet Cowell manages the $67 billion retirement system, but a WRAL Investigation shows the state shifting more and more fund management to outside firms, which charge fees that cost the state hundreds of millions of dollars.

The WRAL Investigates team did the math on 10 years worth of retirement system public records. Like many other state pensions, North Carolina ramped up its investment portfolio with outside managers. In a volatile decade, the management fees soared, but the fund didn't.

Less than 10 years ago, it was a different era at the state's pension fund. Longtime treasurer Harlan Boyles was stepping down, and Richard Moore would soon take over.

In June 2000, the state paid $40.8 million in fees for outside firms to manage a portion of the $58.9 billion state retirement fund.

When Moore took office, he sought to diversify what many considered a highly conservative fund. He increased the state's investments in active stocks, international stocks, so-called hedge funds and real estate.

Treasurer Janet Cowell inherited and built on that strategy. By December 2009, records show outside money management fees grew to $266 million, and the pension fund total stood at $67 billion.

Cowell says it’s too simplistic to assume that the value of the pension fund increase is in direct proportion to management fees.

From 2000 to the end of last year, private firm management fees jumped 552 percent. During the turbulent decade, which includes the historic downturn in 2008, the overall pension fund grew by 13.75 percent. The bottom line is that managers get paid whether investments go up or not.

“Now, you've got a whole decade worth of equity returns lost in a single year, but the fees are going to be the same,” Cowell said.

Ardis Watkins works for the State Employees Association, which represents thousands of retirees who count on the pension fund.

“We hear the fat cats that run investment management firms get even more money out of the system. We have a problem with that,” Watkins said. “I absolutely question why we would make decisions that give more money to more investment managers when we're not getting a return on it.”

Cowell says outside expertise is needed because investing is far more sophisticated than it was even a decade ago. Plus, comparable state pensions have also increased their reliance on private managers, in many cases paying even more than North Carolina in fees.

A year-long independent review of the pension found the state's management costs are "reasonable."

When asked if she could do that in-house, Cowell said “we do not have the salaries that would support that sort of sophisticated decision-making.”

Raleigh financial planner Gerald Townsend says the treasurer deserves time to determine if those fees pay off.

“It's not surprising fees have gone up given the asset allocation,” he said. “It's a controlled decision limited in percentages and is a strategic, long-term decision that we just have to hope the state has consulted enough people that they feel like ultimately they'll be vindicated.”

Long-term, Cowell said she counts on that vindication.

“We'll be looking for if we're paying higher fees for investments they better be performing and giving us a higher rate of return. Otherwise, it's a failed experiment,” she said.

Cowell says that experiment is on a seven- to 10-year cycle, and performance and fees will be weighed over that time frame.

While much of the pension fund is managed outside, fixed-income investments are handled in the treasurer's office, which accounts for about 40 percent of the pension fund.

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  • KermitDFrog Apr 27, 9:36 a.m.

    Looking at Fidelity, they charge ~1% for individual professional fund management. From a percent standpoint NC is paying less than 1% to manage the money. 67,000,000,000 pension fund at 0.5% would amount to feeds of 335 million. Big numbers yes but, percent-wise it seems to mirror what individuals would pay.

  • archmaker Apr 27, 8:29 a.m.

    but i thought private companies could always run public services more efficiently???

  • chfdcpt Apr 27, 8:13 a.m.

    Grimreaper, the NC Retirement fund is one of about 5 in the nation that have the money to pay their retirees.

    Of course, as a local/county/state employee you have to work and contribute a mandatory 6% of your pay to the system. And after 30 years of contributions we get a whoping 50% of what our final salary was, which then gets cut when we start drawing social security.

  • HadEnough Apr 27, 8:09 a.m.

    Here is a bigger issue with state retirement.

    The calculation method used to determine an employee’s retirement based on the highest four years of earnings troubles me greatly. A frequent practice is large pay increases (promotions) four years prior to retirement. State employees are required to contribute 6% of their salary to the retirement system. If an employee’s four highest years average out at 50k per year then at 30 years their retirement is approximately $2,275 per month. If the same employee is given a 20% increase in salary to 60k per year four years prior to retirement, then their retirement becomes $2,730 per month. This represents a $455 per month increase for only a $50 per month increase in contributions for the last four years. Coincidently, state retirement being based on the highest four years is the same number of years as a Governor’s term.

  • HadEnough Apr 27, 8:04 a.m.

    This is typical reporting for Raleigh. Expose something then drop it like a hot potato. We'll never hear any follow ups on this.

  • catfisherman Apr 26, 7:55 p.m.

    Wow! Peggy from "Mad Men" is running our Treasury!

  • grimreaper Apr 26, 7:32 p.m.

    Wow, costs up 552%. Investing billions is not that sophisticated. The bottom line is they are paying these high fees because they have an unsustainable pension just like every other government. They have promised too much and must pay big fees to try to beat the market with complex investing that should not be necessary. History shows that even the best managers never beat the market long term. Just has never happened. All these fees simply will never pay off.

    They will be faced with fixing the pension payout at some point then they can invest more simply. Until that happens, these fees will continue on a fools bet to beat the market.

    Nice to know they are betting on high risk investments with your money. No thanks, I know exactly what all my money is invested in.

  • Winston Apr 26, 7:28 p.m.

    Parents, if you love your children, you'll stress the importance of education. Secondly, you'll encourage them to become pension fund managers, when they grow up.

  • nerdlywehunt Apr 26, 7:26 p.m.

    How about some performance based management? If I don't perform well I don't get rewarded!!!!!