The highly paid money managers of Wall Street often point out that they're not just making money for themselves; they're helping to enrich the retirement funds of millions of state workers, just like you. False! A new study points out that the more Wall Street makes, the less your pension fund makes.
For many decades, it's been accepted wisdom that, overall, investors who pay higher fees get lower returns. Of course, everyone believes that they are able to find the expensive but brilliant money manager who will upend this rule and make them rich, and therefore the hedge fund industry continues to exist. State pension funds, which invest the retirement money of millions of mailmen and teachers and other state employees, are some of Wall Street's biggest customers— and they often get tempted by the promised higher returns of hedge funds and other "exotic" investment types.
Well, they shouldn't be. They should stick it all in cheap ass index funds and be done with it, because, for the Nth^infinity time, academic research has concluded that higher fees from money managers lead to lower returns for investors. In this case, for your retirement funds. The WSJ reports:
On average, 10 states paying the most money-management fees had lower investment returns between June 30, 2007 and June 30, 2012 than 10 states paying the fewest fees... The 10 state pension funds paying the most fees had a median five-year annualized return of 1.34%. The 10 state funds paying the least in fees reported a 2.38% return for the five year period.
Quite simply, the money that your state is paying to hot shot Wall Street money managers who are (falsely!) promising higher returns is money coming directly out of the retirement funds of teachers and whatnot and into the Hamptons homes of hedge fund dudes. So please feel free to sit down and write a letter to your elected officials, asking your state not to do that.
[WSJ. Photo: AP]