TRENTON — New Jersey’s government worker pension fund paid about $728 million in fees to private fund managers last year, according to an annual report of the pension investments.
Public employees who say the fund’s alternative investment returns don’t warrant the high fees and bonuses have tussled with the board that oversees investment strategy, the State Investment Council, which says the declining fund would be worse off without those investments.
This latest report shows that in total, outside fund managers charged the system nearly $400 million in fees and $328.4 million in performance bonuses in the fiscal year that ended in June.
The New Jersey State AFL-CIO called the reported fees “astounding.”
“It’s outrageous that Wall Street millionaires are becoming Wall Street billionaires at the expense of middle-class workers and retirees,” Charles Wowkanech, president of the state AFL-CIO, said in a statement.
Over that same period, the pension fund returned 4.16 percent, ahead of its benchmark and the median for other large public pension funds, but well behind the double-digit returns in recent years. The fund’s balance dropped from $81.2 billion to $79 billion, by the end of June.
New Jersey’s assumed rate of return, the amount actuaries say it needs to avoid adding to its liabilities, is 7.9 percent.
“I do think, and I don’t want to overstate this, but I do think we’ve made some progress with a good many of the labor representatives and labor leaders on the issue of alternative investments,” Tom Byrne, council chairman said Wednesday. “The declining stock market, maybe more than I could have, reinforced this notion that you can’t put all your eggs in one basket.”
About a quarter of the investments are managed by private fund managers. The rest are managed in-house.
“In these private investment areas, there are really big differences between people that are really good and people that aren’t so good,” Byrne said. “So let’s get people are are really good at what they do and pay them what they’re worth.”
The previous fiscal year, 2014, the state spent about $265 million on management fees and $335 million on performance bonuses. Much of the increase from 2014 to 2015 appears in fees and expenses for hedge funds and private equity. The 2015 report includes a new line item for “opportunistic funds.”
The report stressed it would be unfair to compare year over year because of changes in what expenses the council reports and in its methodology.
“The council has expanded the information provided with regard to fees and expenses and performance allocation this year,” the report said.
While the whole fund returned 4.16 percent, alternatives returned 7.89 percent, contributing $1.8 billion in net profits to the fund, the report said, explaining another $$328.4 million in performance bonuses.
At the same time, Byrne acknowledged in the report that the S&P 500 beat the pension fund’s investments last year, a common criticism of the state’s strategy.
But stocks are “among the most volatile asset classes, and there have been entire decades during which stock returns have been terrible,” he said.
“Even so, domestic stocks are our single largest allocation. But putting too many of your eggs in one basket is never a good strategy, and it is all the more important to limit downside volatility for a public pension which is underfunded.”
The pension fund supports the retirement of nearly 800,000 active and retired public employees in New Jersey. Its market value fell to slightly more than $71 billion at the end of December, which is part of the current fiscal year not included in the report.