May 14, 2012 10:13 AM
Teachers Retirement System's Next Lesson: Slicing Fees
Taxpayer-backed union should focus on reducing money manager costs
By Robert Reed/BGA
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That's essentially the attitude of those running the Teachers Retirement System of Illinois, which spent a whopping $1.3 billion over the last decade on financial management fees only to get a lackluster 3.7 percent annual return during that span, according to a recent Better Government Association investigation.
TRS, which doesn't dispute those numbers, also doesn't think there's a problem. Such investment fees are a cost of doing business and returns always fluctuate, the pension fund contends.
Yet after examining 10 years' worth of TRS' escalating fees and uneven results between 2001 and 2010, the BGA is not as sanguine. TRS stakeholders, including thousands of educational system personnel throughout Illinois, would benefit if the pension fund took a harder look at escalating financial management and adviser fees. Here are some suggestions for jump-starting that effort:
Stop defending the status quo. TRS should recognize this is a ton of money and not just brush it off as business as usual. The BGA investigation found that annual fees more than doubled to $203 million in 2010 from $83 million in 2001, while the pension's assets under management grew by little more than a third during that time, to $31.3 billion. Every dollar counts, especially when you consider that under the state constitution, Illinois taxpayers are responsible for making good if the fund ever goes bust.
Fiscal woes make fee-cutting a priority. TRS is ailing financially with resources to meet only about half of its $81 billion in long-term liabilities. That shortfall, along with Illinois' deficit, could mean insolvency by 2030. The financial crunch is a major reason TRS cannot keep paying rising fees.
Break away from the pack. TRS takes solace in saying its fees and returns are in line with other public pension funds of similar size. So what? Just because TRS' fees are in synch with or slightly better than its peers' doesn't mean it's the right path.
Learn from other states. Already the issue of cutting investment fees is gaining traction elsewhere. Wisconsin, New York and California are pressuring financial firms to lower fees and cut the number of outside advisers.
Right now, TRS appears pretty satisfied with its management approach.
If that continues, then perhaps the General Assembly's Special House Committee on Pension Investments, which is exploring state public pension funds' standards and practices, should look into TRS' fees and see what can be done to correct the situation.
Let's hope it doesn't come to that and, instead, TRS shakes off its institutional lethargy and urgently attacks this increasingly important, and expensive, problem.
Robert Reed is director of programming and investigations at the Better Government Association.