A very insightful article in BloombergBusinessWeek highlights some of the ways NC Treasurer Dale Folwell plans to save the state significant sums of money.
First, he plans to save North Carolina at least $100 million by switching state pension funds from actively managed stock funds to simple index funds managed by his office.
This strategy is similar to one often offered to ordinary people planning for retirement. It’s been demonstrated that managed funds seldom perform better than indexed funds, in which the portfolio is matched to a broad index of the market. Plus, the managed funds charge bigger fees, allowing many index funds to offer better returns in the long run.
But Folwell faces obstacles in this effort. The two previous state treasurers signed long-term contracts with private equity and hedge funds, investments known as “alternatives,” which promise good returns but usually charger higher fees. It’s not clear why state officials would commit North Carolina to such deals over a long period of time.
Moreover, the article continues, under these alternative investments, the state’s costs have jumped sevenfold. “North Carolina’s pension fund used to have lower costs. In 2000 the state was paying fees of just 0.1 percent of assets, compared with 0.7 percent” after committing to alternatives, Bloomberg reported.
When you’re talking about a $90 billion pension system, investing over many years, that adds up. “If North Carolina had owned a vanilla stock-and-bond index portfolio instead of shifting into alternative assets, it would have earned an additional $20 billion over the seven years through June 2016,” the article reports, quoting Ron Elmer, who sought the Democratic nod for treasurer last year before supporting Folwell.
Handling the state’s money doesn’t always grab the headlines, but it’s a vital job: The wrong decisions can cost the state millions or even billions, and we ordinary citizens end up paying for that one way or another. To read the article, click here. It’s well worth your time.