Does New York pay too much in fees?

A New York state senator has called for a review of the fees the state’s massive pension system pays to investment managers, including those in private equity.

“It’s clear New York is not getting the best bang for its buck with this arrangement,” state Senator Jeffrey Klein said in a statement released by the Independent Democratic Conference. “While I believe those entrusted with managing our pension money deserve to be fairly compensated for good performance, it seems that instead of making money for us, some Wall Street institutions are simply allowed to just make money off us.”

The IDC published a study showing fees paid to investment managers have shot up 163 percent in the last five years under the watch of state Comptroller Thomas DiNapoli. That’s a rise of $758 million during a time period when the fund – called the New York State Common Retirement Fund – had a net negative return.

“This disconnect was especially pronounced in 2009, when pension fund investments plummeted 29 percent, while management and performance fees increased more than 27 percent, from $162 million to $272.5 million,” according to the Democratic Conference.

However, the study’s calculations have been contested by DiNapoli, who is in charge of the pension fund. He says that the increase in management fees actually has to do with an increase in assets under management – $27 billion as of 31 March 2011, compared with $21.4 billion in 31 March 2007.

Also, fees paid in a particular year do not necessarily align with overall investment results, as is the case with private equity commitments. Returns on private equity funds can be negative in the early life of the funds but are expected to turn around as the investments mature.

DiNapoli accused the Democratic conference of “irresponsibility”. “I find it shocking that these senators did not fully research this subject. Had they bothered to contact my office prior to releasing this report, they would have been educated on the whole story, not the half-truths they present,” DiNapoli said.

Regardless of the political wrangling, a review of the transparency of the system – and the costs of fees – is never a bad thing. The California Public Employees’ Retirement System has realised substantial cost savings just from reviewing its own portfolio and the fees it pays. The same effort will surely benefit New York State’s system.