All but a handful of the local public pension funds in Texas have the same problem. They picked the wrong monkeys to manage their money. The result is underperformance. In many cases it means serious underfunding of workers’ retirements.
That’s the sorry story for most of the pension plans created to serve public employees for our cities, counties, police and fire departments. The data comes from the public pension search toolon the website for the Comptroller of Texas. That’s where you can find a database of all the funds in Texas.
The sorry tale in the data
The data plainly says that the police need to police their funds more actively and the fire departments have a three-alarm pension fire to attend.
Am I indulging in cheap, journalistic hyperbole? I wish I were.
My measuring stick was a simple, utterly conventional and low-cost index fund, the Vanguard Balanced Index fund Admiral shares (ticker: VBIAX), a fund that invests 60 percent of its money in the total domestic stock market and 40 percent in the total domestic bond market.
That’s pretty vanilla. It’s also dirt-cheap. The Admiral shares, which now requires a minimum investment of only $3,000, have an annual expense ratio of 0.07 percent. That means it would cost $7 to manage $10,000 for a year. It’s a fraction of what it costs for individuals and most institutions to have “active” money management.
The measuring stick
This is the most basic, one-stop shopping form of Couch Potato investing possible. Commit the money. Forget about it. Our pension funds, on the other hand, invest in a variety of ways, pay higher fees and make direct investments in real estate. Many also make “alternative investments,” which are expensive to manage and hard to measure. What they most certainly do is provide compensation levels for their managers that few police officers or firemen will ever see.
So, how did the 86 managers do?
I can’t tell you about six of them because they don’t yet have 10-year track records. But of the remaining 80 funds, a whopping 76 failed to beat the cheap and simple index fund. Four beat it, but the real number is probably lower.
So much failure, so many years
In other words, at least 93.75 percent of funds failed to beat a traditional, basic index fund over their 10-year measuring period.
Why “at least”? Because the pension funds report their performance gross before fees. And since three of the funds beat the index fund by only 0.12 percent to 0.40 percent, it’s quite likely that only one actually beat the index fund. That would be a fail rate of 98.75 percent.
For the other 76, it was all downhill. (See the rank-ordered performance list below.) The worst fund (San Benito Firemen’s Pension Fund) trailed by an amazing 5.7 percent, annualized, per year. The Dallas Police & Fire Pension System-Combined Plan and the Dallas Police & Fire Pension System-Supplemental plan were second worst. Both trailed by 5 percent a year, annualized.
Someone needs to talk with these folks about the monkeys they hire to parse risk and reward. With the 1.4 percent annualized return achieved by the Dallas police and fire funds, they would have done far better by going home early after putting every dime in inflation-adjusted U.S. Treasury obligations.
Some trailed by more than others — a lot more
Of the 76 funds that trailed the comparable period index fund return before fees:
— 12 trailed the passive index fund by less than 1.0 percent a year, plus fees.
— 22 trailed by 1.0 to 1.99 percent a year, plus fees.
— 24 trailed by 2.0 to 2.99 percent a year, plus fees
— 11 trailed by 3.0 to 3.99 percent a year, plus fees
— 4 trailed by 4.0 to 4.99 percent a year, plus fees and
— 3 trailed by at least 5 percent a year, plus fees.
Those are wide margins of failure. The result is a large number of funds that are at least 20 percent underfunded and a whopping 19 that are less than 60 percent funded.
With pensions for private sector workers disappearing faster than beer at a tailgate party, many readers may be tempted to shrug their shoulders. It’s a problem lots of people won’t ever get to have.
But it isn’t so. One person’s underfunded pension plan is another person’s higher tax rate. This is a problem we all share.
Related columns:
Scott Burns, “Can Couch Potato Investing Do Better than the Teachers Retirement System of Texas?,” 9/16/18
Scott Burns, “Couch Potato Investing versus Texas State Pension Funds,” 10/6/18
https://scottburns.com/couch-potato-investing-versus-texas-state-pension-funds/
Sources and References:
Public Pension Search Tool, Comptroller of Texas https://comptroller.texas.gov/application.php/pension
“State Public Pension funds — investment practices and performance, 2016 update” https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2018/09/state-public-pension-funds–investment-practices-and–performance-2016-data-update
“Warren Buffett says hedge funds get ‘unbelievable’ fees for bad results,” livemint, May 2, 2016, Sonali Basak and Noah Buhayar https://www.livemint.com/Companies/pJIWtCZZeS55e87zDaAHAP/Warren-Buffett-says-hedge-funds-get-unbelievable-fees-for.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.
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(c) Scott Burns, 2018