HARRISBURG, Pa. (WHTM) – Governor Tom Wolf referenced Wall Street twice in his recent budget address and it wasn’t flattering.
“Our state has been wasting hundreds of millions of taxpayer dollars on Wall Street managers to handle state pension accounts,” Wolf said Tuesday. “Studies have shown simply investing this money in a safe, conservative account would produce a similar return over the long term without the fees.”
Wolf’s remarks have touched off a debate in Harrisburg over investing strategies for the state’s largest retirement funds.
The State Employees’ Retirement System, SERS, is sitting on $27 billion in assets.
The Public School Employees’ Retirement System, PSERS, has nearly twice that at $53.3 billion.
A portion of the money is aggressively invested on Wall Street to generate returns for retirees.
“Those managers who actively manage the assets charge a very high price, almost one percent of the assets annually,” said Representative John McGinnis (R-Blair). “That runs in the neighborhood of $750 million a year.”
McGinnis has a PhD in finance from Penn State, is a former professor and certified financial planner. He says if the state would just put the money in a passively managed index fund, it would be safer and cheaper.
“Instead of paying a hundred basis points, you’d be paying two,” McGinnis said. “So, you could easily save the state $700 million a year.”
But spokeswomen for both SERS and PSERS disagree with McGinnis and call their Wall Street fees money well spent.
PSERS, according to spokeswoman Evelyn Williams, spent $482 million in fees in the last fiscal year, but the asset managers earned an additional $1.27 billion above the index return, making it a huge net gain.
“The real question is, should we “save” on management fees and give up on the excess returns?” Williams asks. “Who then is responsible for the lost performance?”
McGinnis refutes those numbers. He says overall, PSERS’ return last fiscal year was 14 percent while the S&P 500 Index produced a 22 percent return. McGinnis is convinced that over time, index funds outperform asset managers and are considerably cheaper.
“You don’t have to take my word for it. Warren Buffett was saying the same thing on Monday,” McGinnis said. Wolf, of course, said the same thing in his budget address Tuesday.
“I agree, there’s lots of money to be saved on the management fees,” said Steven Herzenberg with the Keystone Research Center.
Herzenberg has his PhD in economics from MIT. He says asset managers can make a positive difference to a fund’s bottom line and, he says cavalierly, the best and brightest wizards on Wall Street don’t have to charge those fees.
“Wall Street can use an improvement in its public image,” Herzenberg said. “Let’s get the ten best investment managers in Pennsylvania and get them all volunteering to work for a dollar a year to help manage the state’s pension fund and help dig the state out of its pension debt problem.”
Herzenberg said Wolf is basically doing the same thing by not taking a salary. Why wouldn’t a well-heeled Wall Street type follow his lead?
McGinnis isn’t waiting on the generosity of strangers, he’s promising to introduce a bill requiring that pension assets be put in passively managed index-type fund.