During the last few weeks, there’s been a lot of news about the way that the City invests the money that backs your retirement benefit and none of it is good.
There are few things less interesting to read about than the condition of your pension fund system. But, other than the financial condition of the City that prints your paycheck and the insurance company that provides your medical coverage, there is nothing more important.
Two weeks ago, the City Comptroller released a report that contained information that didn’t surprise anyone who follows these things closely but which should scare the bejesus out of any active or retired New York City school teacher. According to an article in the New York Times, “The Lenape tribe got a better deal on the sale of Manhattan island than New York City’s pension funds have been getting from Wall Street.”
Turns out that the trustees of the City pension funds, including your fund, the Teachers’ Retirement System of New York City, have been investing the money that backs your pension in ways that have given almost all of the market’s gains for the last ten years right back to the Wall Street firms they hire to do the job as big fat fees
Surprised? I didn’t think so.
Wall Street has spent the last twenty years convincing public pension fund trustees, like the ones who run TRS, that only a company like Goldman Sachs or JP Morgan Chase is smart enough to know how to invest your retirement money. Our trustees bought this story lock, stock and barrel. We all know how well Wall Street has looked after the rest of us the last ten years. Wall Street knows a sucker when it meets one and our pension trustees have been suckered, good.
This stuff is a little complicated but hang with me for a minute or two:
- Over the last 10 years, the return on very basic investments like stocks and bonds—more than 80% of the City’s pension portfolio—has exceeded expectations by more than $2 billion, despite the financial crisis of 2008 and the recession that followed.
- But nearly all that extra gain—about 97% of it—has been eaten up by Wall Street management fees, leaving only $40 million behind for the benefit of City retirees.
- Around 20% of the City’s pension funds is invested in complicated and expensive things called “alternative investments,” such as real estate and hedge funds. The City began to invest in these investments in 2000, just at the moment when they began to do significantly worse than other parts of the market.
- The combination of the poor underperformance of these alternative investments and the huge fees that Wall Street firms charge to manage them for the City cost the pension funds—your pension funds—more than $2.5 billion since the end of 2004.
According to a New York Times editorial, “Even non-experts can grasp a primal personal-finance principle: buy low-cost funds linked to the overall performance of the stock market, be patient and don’t try to outsmart the market or pay someone an arm and a leg to do it for you. That a succession of fund trustees would never have thought of this before and found ways to reduce the damage done by excessive fees, is incredible.”
So let’s ask some of our trustees—members of the UFT who sit on the TRS board—what they think about all of this. The UFT has three representatives on the TRS board of trustees: Mel Aaronson and Sandra March, who’ve been members for more than 20 years, and Thomas Brown. Rank-and-file teachers elect these members to the board in some election process you probably never knew about or can remember.
Michael Mulgrew, president of the UFT, said that “he was happy that his union’s pension fund, TRS, had been performing well. But he said the fees paid to some managers were ‘ridiculous’ and should be renegotiated if those managers are retained. Education’s always being put under reform; maybe some of these financial practices should be put under reform as well.”
Teachers in New York City: According to an independent industry analysis, TRS now has money in it equal to around 58% of the future pension benefits that it must pay to current and retired teachers over the next 30 years. As a comparison, the New York State Teachers Retirement System—which covers teachers who work in schools outside of the City—has around 96% of the money in it required to pay teacher pensions in the rest of New York State. That means that your retirement benefit is only 61% as secure as the retirement benefit of a teacher who works outside of New York City.
Teachers in New York City: The City TRS had a total investment return of 17.6% in 2014. As a comparison, the State Teachers System had a total investment return of 18.2% in 2014—your retirement fund did 3.3% worse than did the retirement fund for teachers in the rest of the state.
Teachers in New York City: In 2014, the cost to run the City pension fund, including administrative expenses and fees paid to Wall Street firms, was almost twice the cost it took to run the State Teachers System.
The UFT trustees sitting on the board of the TRS—the trustees your union nominated and that you elected—are guilty of gross negligence and of “investing-while-stupid.”
Teachers of New York City, if you don’t want to eat cat food when you retire start asking Michael Mulgrew, Mel Aaronson and Sandy March some hard questions about how they manage your pension fund. If you make a big enough ruckus now there is still time to protect your pensions. If you wait much longer I guarantee you that it will be too late.