Monday, September 12, 2016

NC SPIN talks about Pension Fund Fees.

On a recent episode of NC SPIN, the topic was pension fund fees.   I was quoted at the start of the segment.  The video is here:  The bit about the pension fund starts at 17:37.

While the discussion was pretty good and I am glad to see that the fees are getting more and more attention, there were a few comments that I think need addressing.

1. John Hood talks about the idea that if everyone indexed, markets wouldn't be efficiently priced anymore.   While in theory, this is correct as no one would trade on actual information, in reality it would never happen, simply because, as prices got out of whack, investors would have the incentive to pile back in to active investing.  But Hood does emphasize that we need to reduce costs.

2. I think that this focus on getting higher returns is a fool's errand.   This notion that there are good returns out there and that all we need to do is find them is pretty silly.   This might seem counter-intuitive, but in reality an $85 Billion pension fund is going to be broadly invested across stock and bond markets.  Because of this, the fund is really just a price taker - it will earn whatever these broad market segments earn.  The two key decisions that the fund has to make are 1) what is the mix of stocks and bonds and 2) how do we get this mix and at the same time pay as little in fees as possible.

3. Cash Michaels says that "a lot of other states are not experiencing the same kind of luck" when talking about the returns of the fund.  The facts don't support this statement.   NC is lagging other states in performance.   Ron Elmer estimated the returns of NC vs other states and tweeted the results.  Here's the graph:

4.  Mr Michaels also talks about investing in infrastructure projects as a way to boost returns.   I think that this would be a terrible idea - risky and expensive.   Stick to stocks and bonds.

5.  There was some discussion of broadening the control of the fund to a board structure.   I support this idea, providing that we have good people on the board!   

6. The idea of defined contribution plans was also raised.  While a DC plan gets the state out from its pension obligations, it is not a solution to high fees.   So I think that this is red herring.

Bottom line, I appreciate that the panel of NC SPIN took the time to discuss this issue and keep it in the attention of the electorate.  I hope both candidates for Treasurer put fees at the forefront of their campaigns and more importantly, the candidate who is ultimately elected enacts meaningful change.