Will Calpers lead the way on cutting investment fees?
The California Public Employees Retirement System (Calpers), the nation's largest public pension system, today unveiled a plan to slash in coming years the numbers of outside money managers it uses, arguing that their performance couldn't justify the expenditure.
Chief investment officer Ted Eliopoulos told The Wall Street Journal that the $305 billion retirement system would cut the number of relationships it has with external funds such as those that invest in private equity and real estate from 212 to 100. The move would result in fewer funds getting more money from Calpers so that it can "gain the best deal on costs and fees that we can," Eliopoulos told the paper. A Calpers spokesperson couldn't immediately be reached by CBS MoneyWatch for comment.
According to the Center for Retirement Research at Boston College, Calpers pays among the highest fees of any U.S. public pension fund, equaling about $2.7 billion in 2013. As a percentage of its assets, that works out to about 100 basis points. That's well above the 40 basis points that most pension plans pay.
"Higher fees may be warranted if you're getting returns that support the higher payments you're making," Jean-Pierre Aubry, the center's assistant director assistant director of state and local research, told CBS MoneyWatch. "You're looking for returns net of fees to figure out if these are worth it or not. Clearly, California thinks they can do better."
Given its huge size, when Calpers makes a move, it's closely watched by other public pension funds such as New York City's and Pennsylvania's, two funds where officials recently lamented the amount of fees they have to pay to managers. Pension plans want these funds to perform better than they could have done had they invested in a low-cost index fund that mimics the broader market, according to pension consultant Howard Pohl of Bogdahn Group.
"They're big enough to afford whatever they want of afford," he said of Calpers in an interview with CBS MoneyWatch. "The vast, vast majority of funds can't do that."
KKR (KKR), Carlyle Group (CG) and Blackstone (BX) are among the big private equity players that count Calpers as a client, according to the Journal. KKR and Blackstone declined to comment. Carlyle couldn't immediately be reached.
"This is a good thing," Aubry said. "As stewards of taxpayer money, pension funds like Calpers are looking to get the best bang for buck. ... It will probably give other plans reason to review their practices."