In recent years, many pensions have been willing to live with the high fees charged by alternative investment managers, such as hedge funds, in hopes that these firms can deliver high returns with less risk than stocks.The report could add fuel to the growing debate over whether pensions should be moving away from higher-cost, active-investment managers and toward lower-cost, passive investments such as indexes.
As well it should. We’ve seen case after case where Wall Street collects massive fees for services which leave pensioners no better off than they were at the beginning. Rather than chasing the high returns promised by hedge funds and “alternative investments,” pension managers would do well to turn back towards conservative investing. High fees are not always the sign of a quality product, and pension fund boards, often stuffed with union hacks or political appointees, are not the smartest managers in town.There’s a toxic link between public pensions and Wall Street. Union leaders push for unrealistic pay packages; politicians pander by promising fat pensions—and then don’t fund them adequately for fear of voter backlash. The gap between the amount promised and the amount on hand grows, so clueless pension funds fall into the hands of Wall Street snake oil salesmen peddling dubious strategies. Campaign contributions sometimes lubricate the system; Wall Street companies heavily engaged in the public pension sector focus on keeping politicians sweet. It works wonderfully well—until the music stops.