SEANC (the state employees association) recently retained Ted Siedle of Benchmark Alert Inc, a pension consulting firm, to engage in a detailed investigation of the practices of the state pension. Mr. Siedle is a frequent contributor to Forbes and is well known for exposing misdeeds and problems at state run funds.
In Mr. Silton's mind, SEANC is engaged in some sort of misguided witch hunt. He states in his column:
What I don’t understand is the vehement attack spearheaded by SEANC. SEANC charges that the pension has performed poorly and is being hobbled by excessively high fees. Moreover, SEANC has retained a consultant to probe the pension plan for potential improprieties.He goes on to say..
However, there’s no reason to launch investigations, use inflammatory language, or bury the investment staff in public records requests.
Let's be clear here. The reason SEANC retained Mr. Sielde's firm is because the Treasurer's office has failed, over the years, to clearly disclose the fees and compensation arrangements that it has with the numerous Wall Street managers that run the state's money. If the Pension Fund was being run in a transparent manner, SEANC's actions would be entirely unnecessary.
To imply that this is all somehow political, is just silly. SEANC is non-partisan, and it's hard to see why an organization that represents state employees would be going after the Treasurer who is a Democrat for purely political reasons. In the current political environment, Democrats in senior positions are few and far between.
The reason why SEANC is consistently applying pressure to the State Treasurer's office is because the fund is being poorly managed. It is that simple. The pension fund is moving more heavily in to high fee alternative investments. These investments have weak performance records and will hurt the stability of the fund in the long run. Mr. Silton sort of acknowledges this but states:
While I disagree with the decision to move so dramatically into alternatives, I have to respect the decision by Cowell and other fiduciaries to head in this direction. Why? Because after more than 30 years of investing, I know I could be wrong. Investments are a matter of judgment, and there is little doubt that our treasurer and her staff have studied this issue in-depth. We will, in due course, find out who is right. Frankly, I hope she is right and I am wrong, because it will be a difficult and slow process to reverse the commitment to alternatives.
The key issue here is that the Treasurer and her staff may have studied this in depth, but they have reached the wrong conclusion. There is a mountain of academic research that will confirm this. This academic research is very clear. So let me summarize it:
In the long run, high fee investments will underperform low fee investments.
It is that simple.
If the pension fund wants to reduce risk, then there are low fee ways to do this, but investing in alternative investments will not achieve that goal. The pension fund's poor performance in 2008 is anecdotal evidence of this fact.
Finally, I'd note that in my discussions with the SEANC folks, they understand the difference between a well funded plan and a well managed plan. North Carolina's plan is relatively well funded compared to a lot of states (relatively is the key word here). But it is not well managed. A recent Op-Ed by Ardis Watkins of SEANC nicely explains this distinction.
A poorly managed pension fund is something that all citizens of NC should care about. But the good news is that fixing the problems is pretty easy.
All SEANC is trying to do is move the fund in the right direction for the benefit of everyone.