Open letter to all CTPF Trustees: Explain the High Fees

An Open Letter to all CTPF Trustees was posted on social media asking to justify the enormous fees the Chicago Teachers Pension Fund is paying its many money managers.

According to the 2023 annual report CTPF approved paying +71 money managers $44 million in fees when their total earnings = 9.1%. To compare, a basic 60/40 portfolio earned 17.2% in 2023, a mix of 60% U.S. equities and 40% U.S. treasury bonds, (Crain’s Magazine), wrote Tom Butterfield, a veteran teacher and financial literacy advocate who often writes on financial topics for teachers.

“How do we justify this strategy & do we have a system to evaluate if these fees are necessary?” he wrote. “I understand fees are a part of financial management. But 71 advisors + 44 million seems very excessive. Just doing a basic calculation of this, 44 million following a lazy low-cost 60/40 portfolio in the last 30 years would have earned =$767,773,699.”

CTPF Teacher Trustee Quentin Washington, who was just re-elected, responded that the fees are justified because they consistently do well and beat the benchmark.

But what exactly is the benchmark and who sets it?

“We are willing to listen but need facts & numbers we can understand and compare,” Butterfield said. “The phrase ‘it beats the benchmarks’ should include exactly what benchmark they're comparing.” 

Butterfield further stated that beating the benchmark is often used as financial jargon to unsuspecting clients that their funds are winning when they instead are underperforming and costly.

The issue of high fees is a hot one that heated up during the recent pension election. The Chicago Teachers Pension Fund is only 47 percent funded and most members earn a pension that is less than Social Security which is considered the minimum wage of retirement. 

Butterfield wrote on FB that members find the financial industry very complicated, but he has also learned that many financial statements are purposely made to be complex as it leads to clients blindly running into the waiting arms of high-priced money managers.

“I fear these trustees, money managers, and unfortunately, our union is counting on our ignorance & silence,” Butterfield wrote. “I asked a board member trustee to provide me a simple explanation of how much we paid these funds. He refused but sent me a 157 page financial document. It took a while but I found the $44 million buried in those documents. Now the deflecting. It's all very troubling.”

Public pension funds began to invest more in alternative assets after the subprime disaster in 2008 and before to make up for the funding shortfalls. One pension trustee said more than 20 years ago the CTPF had about 10 money managers when it was 100 percent funded, whereas today the Fund has more than 70 money managers while it is only 47 percent funded.

Long-term investment returns for public pension plans show virtually no difference between their often-complex strategies and a simple 60% equity/40% bond index, one report stated. Public pension funds that are investing in more alternatives usually means higher expenses for hiring outside investment managers. They also tend to hire more  outsiders to handle more traditional investments.

“The question is whether all this shuffling of investments and greater reliance on complex assets — which comes with higher fees and more staff — is better than sticking with index funds of traditional stocks and bonds,” stated the Center for Retirement Research at Boston College report. “If public plans cannot reasonably anticipate higher long-term returns from a complex active approach, a strong argument could be made that they should stick with a simple and transparent strategy.”

Chicago Teachers Union VP Jackson Potter responded to Butterfield on Facebook to defend alternative investments. He wrote lagged returns of some alternative assets can distort their overall reported return and studies that focus on the past decade when the markets were up which favored index funds over active management may overstate the advantages of passive investing. He said the report was not definitive.

But a big critic of alternative investing is the CTU’s parent union, the American Federation of Teachers or AFT. 

"While high fees prove very beneficial to the asset managers who collect them, the impact of “2 and 20” on pension funds can be dire,” stated the AFT report entitled “The Big Squeeze - How Money Managers’ Fees Crush State Budgets and Workers’ Retirement Hopes. “Every dollar paid in fees to alternative asset managers represents a dollar that does not stay in the pension fund, earning returns and compounding year after year. For pension funds investing in fund of funds—i.e., funds that invest in other funds, thus charging the investor an additional layer of fees—the fee burden is even more pronounced … Our research demonstrates that excessive fees paid to alternative investment managers are a significant contributor to funding shortfalls."

But Potter was not convinced.

“I get that for individual investors,” he wrote. “There is usually a different set of returns and considerations for institutional investors. That is why passive investing is not utilized by most pension funds or multi-billion dollar mutual funds. The article Tom shared suggests the verdict is still out on that question. Our teacher counterparts in Ontario are over 100% funded in part because they purchased sports teams through their pension fund. Passive investing doesn't allow for that. Passive investing also typically guarantees you will have stocks in the armaments industry, fossil fuels, anti-union employers, school privatizers. So, there are ethical and economic considerations.”

CTPF today invests in private equity which invests in fossil fuels and anti-union employers.

“Typically, those who advocate against passive funds in favor of higher-cost complex funds tend to have a vested interest in benefiting from management fees,” Butterfield wrote. “I’m still waiting for concrete data showing what we received for the $44 million spent last year, aside from the explanation ‘that’s how it’s done.’ Even if you believe that, could you at least clarify what benchmark you are using to assess whether the money managers are delivering results? Why are members having to do the work to find these answers while the trustees remain silent?

“I want to avoid jumping to conclusions, but I find it puzzling why you and the union are involved with our pension. This is our future, and you are elected representatives for members, not the money managers or businesses.”

Potter stated that AFT pension advisors believe the Pension Fund should actively invest in affordable housing through the AFT-CIO program and other non-passive funds to ensure they are supporting union projects that help people. The CTPF Trustees had a heated debate after an AFT-CIO rep wanted to manage some pension money, questioning how affordable their housing is and why they’re focused on renting and not owning.

Butterfield said the trustees allegiance should be to the union members and not the money managers.

“I do not object to reviewing fees,” Potter wrote. “And it’s not the same to say remove all money management with fees. I assure you every pension has investors that help to invest in different asset classes. So to say go all passive funds is not something any pension fund of any significant size, that I’m aware of, has ever done. So, I think hearing about asset classes and why all funds consider them in separate decisions, might benefit this conversation rather than assuming that abandoning the strategy altogether, is wise or meets the standard of responsible fiscal stewardship. Some social justice funds with great track records have fees and decent returns.”

Butterfield had three questions for the Chicago Teachers Pension Fund Trustees:

1. What’s the trustees' position on asking for a complete pension audit so we can see where our money is going in regards to overall fees?

2. Is the performance+ cost of fees outperforming the market. Would they be open to a more passively managed approach like low-cost index funds, which could save millions of dollars a year?

3. I understand that the trustees want to prioritize green energy and black-owned businesses. I have no problem with that, but I would like to know how they will ensure those investments are performing when compared to the market average. If a company is underperforming, will the trustees have a system to replace those investments? How will they monitor it?