Let’s fix how IPERS funds are invested

The state of Iowa public employee pension plan, IPERS, has paid more than $1 billion to the financial industry over the last decade in fees, commissions and bonuses. Did IPERS receive something of value for that very expensive help? Let's see.

In 2013, IPERS paid out almost $161 million in fees. The direct costs included i nvestment management fees and administrative expenses and commissions of more than $65 million. The indirect costs (fees charged by the investments IPERS owns) came in at more than $95 million.

IPERS believes in chasing alpha - the term used to describe the return beyond the market return (think S & P 500). Receiving a return beyond the market is the only reason to pay those smart financial firms all that money. But those highly paid financial firms failed to produce any return beyond the benchmark indexes over the last one-, three-, five- and 10-year periods.

Study after study demonstrates the inability of these smart financial people in trying to outsmart other smart financial people. They fail at a very high rate.

The real experts have been telling us this for years. Nobel laureates in economics (William Sharpe, Paul Samuelson and Milton Miller). Chief investment officers and academics who know the research and write books on it (David Swensen, John Bogle and William Bernstein). All those men (including Warren Buffett) tell us how this approach is failing the average investor. Are we listening?

The financial industry spends a great deal of your money trading securities and taking risks. Risks? IPERS trades in derivatives (trying to predict price moves in other investments), options and futures (trying to predict the future), high-yield bonds (junk bonds issued by sick organizations), and something called private equity (money gets locked up with little in the way of transparency, especially when it comes to fees).

Financial reports and audits tell us IPERS is doing well because it is doing better than the average pension system (most are chasing alpha just like IPERS). Don't be fooled. They are getting a D in class when others are getting an F.

Will the financial industry fix this problem? Hardly.

When will we say enough? Ultimately, it will be up to the recipients of IPERS and Iowa taxpayers to fix this problem. If we don't stand up to the financial industry, it will continue unabated.

What is the fix? IPERS does the investing, using inexpensive index funds. This could reduce the yearly fees (direct and indirect) to about 0.04 percent, or about $11 million. What will this accomplish?

This will save IPERS about $150 million per year. Plus, your return on investment would be higher as you match the benchmark index minus the 0.04 percent. Savings from reduced costs and increased returns very easily could equal more than $200 million a year.

The last decade already has happened. Are we going to do it again?

' Mike Finley of Cedar Falls spent 26 years serving in the U.S. Army and is an author on financial literacy. Comments: finley2663@sbcglobal.net