If you are lucky enough to collect a pension, there’s something that’s likely robbing you of gains that are rightfully yours: pension fees. What’s more, you might not have any idea they''re there because some of those fees may be hidden.
Let’s break this down to the basics. Unless it’s quite large, your pension isn’t managed directly by your employer. Most likely, your employer hired an investment firm to shoulder the management burden. And if your employer does manage its own plan, it might have submanagers such as hedge funds, private equity firms and other financial institutions as part of the management team. (For more, see Where Do Pension Funds Typically Invest?)
Regardless of how it’s managed, the pension fund and all of its members have to pay management fees to the entities making investments on your behalf.
The California Public Employees’ Retirement System (CalPERS) is one of the largest pension funds in the nation, serving more than 1.8 million people. In 2015, it reported having paid $3.4 billion in fees to private equity managers since 1990. The fund has $28.7 billion of its $295 billion investment with outside organizations, according to a Wall Street Journal story. (See also: Could Calif. Teachers Pension Fund Save Hedge Funds?)
Pension Fees Rarely Disclosed
This kind of disclosure isn’t standard practice. Most pension funds don’t report fee payments to outside investment firms, according to the Wall Street Journal, although an increasing number are bowing to the pressure and disclosing the fees.
U.S. public pension funds are now the largest investors in private equity firms, with more than $350 billion committed around the world. Private equity firms usually charge between 1% and 2% of assets and up to 20% for other gains like profits earned from buying and selling companies. PE firms accounted for CalPERS’ largest investment gains, according to a 2015 disclosure.
Maryland’s public employees’ plan paid an estimated $500 million in undisclosed fees, according to a study by the Maryland Public Policy Institute. If that’s true, nondisclosed fees could be costing funds $20 billion per year collectively. That means every person who counts on a pension for retirement income will pay a portion of these fees on top of other disclosed costs.
Greater Scrutiny Beginning
These undisclosed fees have come under fire in recent years. An SEC report found that most private equity firms inflate fees and expenses for funds in which they hold stakes. The report mentions that some of these fees could be innocent errors, but others may not be.
Either way, pension funds are being forced to get a better handle on these fees. Even that is no easy task. Some pension plans have hired outside consultants to help measure the performance of PE investments relative to the fees.
How Do You Know?
You’re relying on your pension fund to provide your retirement income, but many pension funds are having performance problems. CalPERS, for example, reported annual gains of only 0.61% – much lower than the fund's expected average of 7.5%.
The Maryland Pension Fund reportedly spent 50 cents on fees for every $1 in investment income – an outrageous amount in a world where individuals could pay fees on their personal retirement fund of less than 1%.
That has caused more pension recipients to ask questions. The unfortunate news is that you’re not likely to know about these fees unless the fund places them in the disclosure documents. You can find disclosure documents on your pension fund or company website but other questions to ask the fund’s trustees could include:
1. How is your pension fund performance compared to others in similar fields?
2. If it’s underperforming, how much and over what period of time?
3. Is it meeting its long-term projections?
4. How much is the fund paying in fees?
5. Are any of these with outside investment managers?
6. Are those outside investment managers meeting their benchmarks?
The Bottom Line
If you’re separated from your employer either through leaving or retirement, you have the option, if you’re unhappy with the performance, to pull your money from the pension and invest it on your own. Make sure to weigh what you get as part of your pension compared to what you would receive if you invested privately. Consult with a financial professional before making the move.
For related reading, see How Do Pension Funds Work?