Correction and Note to Readers:
In my June 23rdcolumn on the performance of the Teachers Retirement System pension fund, I incorrectly reported the 10-year annualized return as 9.95 percent. The correct figure is 8.34 percent, a significant difference. All other return figures were correct.
The TRS pension, however, still trails investing in a balanced index fund by an annualized 1.24 percent. It’s also larger than the 0.97 percent gap in the previous 10-year period.
The change means that index investing would not have closed the entire unfunded liability gap of $46.2 billion. Instead, the recalculated additional return of $18.44 billion would have covered 40 percent of the gap.
You can read the earlier column, with corrections, here.
My suggestion — that Texas teachers would be better served by low-cost index fund management than by management fees that cost over $1,270,065,736 a year — still holds.
A Special Measure for Money
Allow me to introduce a special measure for money. I call it the YATPI. It’s short for “Years of Average Teacher Pension Income.” Rather than talk in millions and billions, it’s a real-life measure.
We need that. It’s how we’ll examine how much money the Teachers Retirement System of Texas is spending on management fees that could be used to provide years of pension income for the 1.6 million people who make publicly funded education in Texas happen.
Before we start, let me say some good things about the fund and its managers.
It’s All Relative
First, it’s true that the long-term performance of the TRS fund compares poorly against a low-cost balanced index fund. But it compares well to the largest category of balanced funds as a whole.
According to figures from Morningstar, the TRS fund beat the average fund in this category soundly over the last 10 years. TRS earned 7.1 percent annualized. The average balanced mutual fund earned 6.18 percent. TRS also did better than the average fund over the last five-, three- and one-year periods. That speaks well for the TRS managers.
But the fund still fails to beat the low-cost index fund alternative.
And that’s the problem. Being a superior part of an expensive system doesn’t cut the mustard for the 1.6 million teachers. It doesn’t cut it for Texas taxpayers who may need to help out, either.
Detailed Reporting from the TRS
Second, TRS does a great job reporting on its operations. About as transparent as can be. Their comprehensive 170-page report provides a moveable feast of numbers and details.
But we’re still left with the pension funding issue. The plan is short $46.2 billion. That’s the additional money needed to cover pension commitments.
How did this happen? The fund didn’t earn the returns needed to provide the promised benefits.
You’ll find where much of that money went on Page 110 of the comprehensive annual report. It shows a list of management fees paid from the fund in the year ending June 30, 2018.
Where did over $1 billion go?
TRS paid out, in different ways, $1.27 billion of the $151.2 billion in the fund. That’s 0.84 percent of assets, a middling figure compared to managed mutual funds. The average teacher pension (our unit of YATPI) in the same period was $2,258 a month, or $27,108 a year, according to Page 147 of the report.
So the management cost for one year was 46,852 YATPIs. That’s46,852 years of average teacher pension income.
That isn’t all. On Page 96 you learn they spent $5.7 million on investment research fees and $6.8 million on investment consulting services. That’s another $12.5 million. Another 463 YATPIs.
Is this a big deal?
The system currently pays benefits to 420,000 participants. So spending over 47,000 YATPIs is significant, but not earth shattering. Then again, it would be good if 47,000 years of pension income went into teacher pockets, not well-paid manager/consultant pockets. The choice is that simple.
A Real-World Alternative
But let’s get practical. Is there a real-world alternative to the expensive conventional wisdom of pension managers?
Well, here’s one suggested by a concerned reader. Let’s compare TRS pension fund performance to the index fund investments in the 401(k) plan at Exxon Mobil.
Very real world.
The balanced fund choice in the Exxon Mobil plan returned an annualized 8.9 percent over the 10 years ending September 30, 2018. (Remember, the TRS plan earned 7.1 percent annualized in the 10-year period ending August 31, 2018.) In fairness, it should be noted that the Exxon Mobil plan is relatively aggressive, with 75 percent committed to three equity funds and 25 percent committed to bonds.)
So a real-world company, known for the quality of its employee benefits, made the choice to index. They made it long ago.
The annual cost difference is even more striking. Exxon Mobil documents note that fees and expenses for the balanced fund in the plan amounted to 0.0215 percent of assets. The TRS plan, meanwhile, pays out 0.84 percent a year in plan assets for management fees.
So the Exxon Mobil balanced choice is managed for a tiny fraction — only one fortieth — of what it costs to manage the TRS pension.
Nor does the TRS expense figure count other spending like investment research fees, etc.
A Fraction of the Costs
How much is the difference?
Based on the $151.2 billion in TRS plan assets, an annual fee of 0.0215 percent would cost $32.5 million.
Yes, you read that right, $32.5 million.
That’s a saving of $1,237,561,322.
Measured in pension years, it’s 45,653 YATPIs.
Another figure in the TRS report provides an additional measure. Since the TRS fund is actively managed, it buys and sells holdings more often that index funds. That costs money in brokerage commissions. On Page 111 of the comprehensive report we learn that TRS spent $64.8 million on brokerage commissions. That, alone, is twice the $32.5 million it would have cost if they had chosen the low-turnover road taken by Exxon Mobil.
It’s another 2,392 YATPIs.
As the late Sen. Everett Dirksen has been credited with saying, “A billion here, a billion there, and pretty soon you’re talking about real money.”
It’s real money in YATPIs, too.
Related columns:
Scott Burns, “Couch Potato Investing Beats TRS Pension Fund, Again,” 6/23/2019 https://scottburns.com/couch-potato-investing-beats-trs-pension-fund-again/
Scott Burns, “The Simplicity Manifesto,” 3/31/2019 https://scottburns.com/the-simplicity-manifesto/
Scott Burns, “Can Couch Potato Investing Do Better Than the Teachers Retirement System of Texas?,” 9/16/2018 https://scottburns.com/can-couch-potato-investing-do-better-than-the-teachers-retirement-system-of-texas/
Scott Burns, “Couch Potato Investing versus Texas state pension funds,” 10/6/2018 https://scottburns.com/couch-potato-investing-versus-texas-state-pension-funds/
Scott Burns, “Local pension fund performance: All the Wrong Monkeys,” 11/26/2018 https://scottburns.com/local-pension-fund-performance-all-the-wrong-monkeys/
Sources and References:
Teachers Retirement System of Texas, 2018 Summary Annual Report, https://www.trs.texas.gov/TRS%20Documents/cafr_summary_2018.pdf
Teachers Retirement system of Texas, 2018 Comprehensive Annual Report, https://www.trs.texas.gov/TRS%20Documents/cafr_2018.pdf
Teachers Retirement System of Texas, 2017 Summary Annual Report, https://www.trs.texas.gov/TRS%20Documents/cafr_summary_2017.pdf
Texas Comptroller Office Public Pension Search Tool: https://comptroller.texas.gov/application.php/pension
Pension Review Board, Public Pension Data Center https://data.prb.texas.gov/plans/327.html
Morningstar report on Vanguard Balanced Index, Admiral shares https://www.morningstar.com/funds/xnas/vbiax/quote.html
Morningstar report on Vanguard Total Stock Market Index, Admiral shares https://www.morningstar.com/funds/xnas/vtsax/quote.html
Morningstar report on Vanguard Total Bond Market Index, Admiral shares https://www.morningstar.com/funds/xnas/vtsax/quote.html
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo: Teachers Retirement System
(c) Scott Burns, 2019