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This should be the most nonpartisan issue in America: don’t give middle class retirement dollars to high-priced Wall Street money managers for no good reason. And yet...


Honestly, this should have all been settled years ago. Decades ago! It has been accepted knowledge for quite some time now that the effort of investors to “beat the market” by selecting various professional asset managers who charge high fees is sucker’s game. In aggregate, it never works. Yes, some will beat the market each year, and a very very tiny number will beat the market for many years, but in aggregate, the fees charged by money managers causes investors to actually make less in the long run than they would have gotten simply by investing in a low-cost index fund, like those offered by Vanguard, which mirror the broad market.

Everyone on Wall Street knows this and their response is “Yes, but I am the one who will beat the market for you!” Statistics tell us that A) they are likely wrong, B) even if they are right for the moment they will experience reversion to the mean, and C) when we look at the entire pool of money managers, their high fees make it a certainty that they will not do as well for investors as an index fund. Searching for the genius money manager who will beat the market is the rich person version of buying scratch off lottery tickets. You’ll win here and there, but in the long run, you will lose money.


Now then. Let’s consider pension funds: huge pools of money that will ostensibly fund the future retirements of millions of workers who paid into them. Both public and private pension funds across America are in varying degrees of crisis, because they made assumptions about how much money they would earn on their investments that turned out to be much higher than the amount they actually earned. How big is this problem? Well, local, state, and federal government pensions alone are short an estimated $7 trillion. It is fair to say that this is an enormous fucking crisis that, though it is moving slowly, will only get worse until extremely drastic action is taken—action that will inevitably leave millions and millions of people very, very mad.

The final solution to our pension crisis (whether it’s a public bailout or a haircut for retirees or something else) will be painful. But what if there were a way for pensions to painlessly stop losing tens of billions of dollars? It might not be enough to solve the whole crisis, sure, but it’s still billions of dollars that could be going to fund retirements. Well guess what, there is a way: get pension fund money out of the hands of pricey money managers and put that shit in low cost index funds.

A Willis Towers Watson survey found that just the top 100 “alternative asset” money managers were managing $1.4 TRILLION in pension fund assets in 2015. Consider the fact that the average hedge fund charges 1.5%-2% of assets as a fee every year, on top of a cut of profits. Also consider the fact that Vanguard’s simple S&P 500 index fund charges a fee of only 0.05% per year—less than one-thirtieth the cost of a typical hedge fund. Now consider the fact that that cheap index fund has been beating hedge fund returns for seven years now. All of those pension fund investors have paid billions of dollars to money managers in order to make less money than they could have otherwise. Don’t take it from your good ol’ internet blogger friend (even though you should)—take it from Warren Buffett, America’s greatest investor, who wrote this in his latest annual letter:


The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds...

The wealthy are accustomed to feeling that it is their lot in life to get the best food, schooling, entertainment, housing, plastic surgery, sports ticket, you name it. Their money, they feel, should buy them something superior compared to what the masses receive.

In many aspects of life, indeed, wealth does command top-grade products or services. For that reason, the financial “elites” – wealthy individuals, pension funds, college endowments and the like – have great trouble meekly signing up for a financial product or service that is available as well to people investing only a few thousand dollars. This reluctance of the rich normally prevails even though the product at issue is –on an expectancy basis – clearly the best choice. My calculation, admittedly very rough, is that the search by the elite for superior investment advice has caused it, in aggregate, to waste more than $100 billion over the past decade. Figure it out: Even a 1% fee on a few trillion dollars adds up. Of course, not every investor who put money in hedge funds ten years ago lagged S&P returns. But I believe my calculation of the aggregate shortfall is conservative.

Much of the financial damage befell pension funds for public employees. Many of these funds are woefully underfunded, in part because they have suffered a double whammy: poor investment performance accompanied by huge fees. The resulting shortfalls in their assets will for decades have to be made up by local taxpayers.

That is why Warren Buffett is about to win a million-dollar bet that an S&P index fund would beat a set of hedge funds over a ten-year period.


Eliminating (or greatly reducing) fees is the easy way for pension funds to save money, before they start doing the hard things. Not blowing your money on what amount to desperate gambles is the easy improvement to make. Some major pension funds have already moved in this direction. The chairman of the state investment board in Illinois, the state with the most severely underfunded pension in America, has spoken out loudly in favor of indexing pension fund assets. (Do not be swayed by arcane technical objections about volatility; the underlying point is that a huge pension fund can design a simple portfolio of low-cost index funds that will meet its long-term needs just as well as what is has now, while charging much lower fees.) This is an example of something that is common sense, but which will take a shockingly long time to actually come about. There is a lot of money on the line, after all.

Is your pension fund wasting money on Wall Street? If they are, agitate. That’s your fucking money. When the day comes that they tell you they can’t pay for your retirement, think about how many mansions you bought for hedge fund managers.

Pension fund management strategies are going viral online!