Pension viz misses the mark

Letters to the Editor |

Apr. 5, 2012 — Your story on management costs of public pension funds doesn’t seem to be up to your usual high standard — or at least not yet. The deeper questions are whether the costs of managing the funds are out of line with the costs of managing investments more generally, and whether the performance of the managing employees and outside contractors has been worth the expenditure. To stick with your CALPERS example, on the face of it, it’s not clear that $49 million — or even $156 million — is too much to pay for managing $248 billion. The sum of the two costs is still less than one tenth of one percent of the amount under management.

You could extend your analysis by comparing to measures that are out there on private investment management costs and performance.

Also a minor technical note: when a pension fund pools investments statewide, there is a lot of administration for dealing with employees in many different governments and agencies. Therefore total employee costs probably include a fair amount of salary that shouldn’t be framed as a direct cost of investment management. That component is properly a cost of using a statewide pool, but then it should be compared to the sum of the likely costs of each municipality and agency managing its own retirement funds.

The bottom line of all this is that proper management of money costs money. Banks that wouldn’t pay these costs cut corners on mortgage paper processing, with horrible consequences. Public investment funds also need to pay the real costs of proper management. The deeper questions are what the appropriate levels of those costs should be, and whether the management, employed or outsourced, did a job that was worth what they cost.

Michael Cohen, Ann Arbor, Mich.

Editor’s note: to clarify, the data visualization was about a particular subset of costs: the fees paid to outside consultants, not management costs in general.


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