Public pension plan executives slam fee study

A study of money management fees paid by state pension systems released Tuesday by two Maryland think tanks is drawing criticism from pension executives for its methodologies and conclusions.

“The study used incorrect numbers that essentially double-counted the North Carolina pension fund's management fees, skewing them by $218 million,” said spokesman Schorr Johnson in an e-mail. The fiscal 2012 Operations Report of the $81.1 billion North Carolina Retirement Systems, Raleigh, shows fees of $317 million, which would make North Carolina's cost ratio about 0.42%, Mr. Johnson noted. Treasurer Janet Cowell, the sole trustee, is seeking a correction from the think tanks.

The study, conducted by the Maryland Public Policy Institute and the Maryland Tax Education Foundation, compared management fees and investment results for 46 states with 2012 fiscal years ending June 30, and found the 10 states with the highest fees had a median rate of 0.61% of total assets, compared with 0.22% for the bottom 10 states. The median five-year annualized return for the plans was 1.5% compared with 2.19% for an indexed portfolio, which the study's authors advocate.

According to the authors, the states paying the highest fees had an annualized five-year return of just 1.34%, compared with 2.38% for the lowest fee-paying states, with the five highest fees paid by South Carolina, Missouri, Pennsylvania, North Carolina and Maryland.

Michael Golden, spokesman for the $40.6 billion Maryland State Retirement and Pension System, Baltimore, said that in addition to “egregious errors” in a similar report a year ago that have not been corrected, this year's median of fees paid was skewed by underreporting in other state systems. “If the numbers are wrong, you can't really compare,” Mr. Golden said in an interview.

Mr. Golden also took issue with the authors' call for indexing, noting Maryland's actively managed returns as of May 31 outperformed the benchmark by 120 basis points, net of fees. Having those assets passively managed “would have cost us $300 million,” he said. “There is a correlation between fees and returns, and it is positive.”

Mr. Golden criticized the study's authors for a lack of accountability. “They needlessly cause concern among our members and taxpayers with inaccurate information,” he said.