Like many cities around the country, New York City has backed itself into a corner where it is relying on a high rate of return to keep its pension plan healthy, and is turning to Wall Street to help boost the performance of its investments. Despite the fact that using outside managers hasn’t been shown to significantly boost fund performance, this management doesn’t come cheap: Bloomberg Businessweek reports that the city is currently paying $472.5 million in Wall Street fees, up 28 percent from last year and far higher than the $280 million the city paid less than a decade ago:
The growing cost underscores the challenge Stringer and municipal officials across the U.S. face in reducing pension-management fees and boosting returns as the gap between promises to retirees and the assets they have to pay for them has widened to $1 trillion, according to data compiled by Bloomberg. New York’s funding deficit alone totals $72 billion.To help shore up their funding, retirement systems such as New York’s have turned to riskier and more expensive asset classes, such as private equity, hedge funds and real estate, to hit targeted annual returns of 7 percent to 8 percent. Money managers of those funds typically charge 2 percent of assets they oversee, plus 20 percent of profits, which is higher than traditional stock and bond funds.
The city’s new comptroller claims to be serious about reducing the amount the fund pays in fees and possibly managing more of the funds in-house. This is a good idea, but it will likely take more than that to solve the problem, which lies more with the funds themselves than with their management. The truth is that New York’s investment return targets, at somewhere between 7 and 8 percent, are probably too optimistic. Unfortunately, it’s difficult to scale these targets back without asking taxpayers to put more money into the fund or asking pensioners to accept lower benefits, neither of which is likely to be particularly popular.[Scott Stringer photo courtesy of Getty Images]