Indiana’s Retirement Fund: A Sucker Bet?

August 30, 2012

by PHIL TROYER, J.D.

Many years ago, I traveled to Las Vegas to attend a wedding. While there, I struck up a conversation with a young man who worked at the hotel in which we were staying.

“Do you gamble much?” I asked.

“No,” he replied. “I used to, but then I looked around at all of these palatial casinos and realized they could not have been built without suckers like me thinking we could beat the house.”

Perhaps our legislators would do well to take a random walk down Wall Street and visit the palatial offices of our nation’s top “money managers.” Better yet, they should spend a weekend in the Hamptons touring the grand estates and yachts of these denizens of finance. Maybe then they would realize how hundreds of millions of Hoosiers’ hard-earned dollars were being wasted in a futile attempt to beat the stock market.

In January of this year I noted the Indiana Public Retirement Service (INPRS) had paid a panoply of Wall Street firms and international hedge fund managers over $137 million dollars during 2011 to obtain a rate of return that was significantly lower than what could have been achieved by simply purchasing the SPY (an exchange traded fund that tracks the S&P 500) for $7 on Scottrade. (1)  In fact, according to a recent study published by the Maryland Public Policy Institute, Indiana ranked 10th in state public-pension funds paying the highest percentage of fees to Wall Street firms. (2)

So, how did INPRS do for 2012?  Well, the annual report will likely not come out until later this year. The INPRS executive director, Steve Russo, recently gave us a hint. He informed state lawmakers our public-pension funds only achieved a one percent rate of return this year. Again, this was lower than the S&P 500, which grew by three percent over the same period. More importantly, this was significantly lower than the seven percent annual rate of return assumed by INPRS actuaries.

All of this begs the question: How long will they allow INPRS to continue paying hundreds of millions of dollars to Wall Street firms to underperform the general market?

In testimony before Indiana’s Pension Management Oversight Commission last year, the Indiana Policy Review Foundation laid out the significant savings that could be achieved by following other states in moving public employees to a defined contribution plan – just as most private companies have converted their failing pension plans into sustainable 401(k) plans.

Unfortunately, state legislators seem content to double down their bet that maybe, just maybe, this will be the year  their INPRS bets in the stock market will finally pay off big. They hope it will save our public pension systems before Hoosier taxpayers are required to cover the shortfall.

In the meantime, Wall Street continues to profit from our folly.

Phil Troyer, J.D., is a Fort Wayne attorney and a founding member of the Indiana Policy Review Foundation.

Endnotes

1. If the Combined Retirement Investment Fund had matched the S&P 500 for 2011, it would have earned an addition $1.25 billion.

2. Jeff Hooke and Michael Tasselmyer. “Wall Street Fees and the Maryland Public-Pension Fund.” The Maryland Policy Report, No. 2012-04. July 25, 2012.

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