The Question of Fees Paid Out by the UC Retirement Plan

by Charles Schwartz, Professor Emeritus, University of California, Berkeley
posted at   http://socrates.berkeley.edu/~schwrtz          July 9, 2008


         In recent years I have made repeated requests to the responsible UC officials for a more fullsome public reporting of the fees paid out in connection with the investment activities of the pension fund.  Those requests were ignored, even though I based my suggestions on practices well established by other public pension funds, e.g., CalPERS.  The following letters detail my more recent attempts (and eventual success) at obtaining some of this information.                      

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                                                                                    September 18, 2007
Paul Wachter, Chair
UC Regents’ Committee on Investments
Main Street Advisors
3110 Main Street
Santa Monica, CA 90405

Dear Regent Wachter;

     This is a request for more detailed and accurate reporting of fees and expenses paid out in connection with the University of California Retirement Plan (UCRP).  I have made such a request in the past, to no avail, but I thought another attempt might be worthwhile.

     First, let me show what a confusing mess is now presented by the responsible UC offices. 
a) The last annual report of the Treasurer states, in a footnote on page 29, “UCRP’s total returns are net of (after) investment management and administrative expenses of 0.04% of average annual market value.“  That amounts to about $17 million.
b) The last UCRP Annual Financial Report states, on pages 13 and 38, that the plan’s “Administrative and Other Expenses” were $34 million for that same year. 
c) A press release from UCOP on August 7, 2007, gives this last year’s return on investments as 19.1% (gross of fees) while the latest Investment Performance Summary presented to your committee gives that result as 18.83% (net of fees).  Those two numbers imply that the fees and expenses amounted to 0.27%, or about $120 million.

     I am sure there is a rational explanation for these widely divergent numbers; but how is a reasonable member of the public to know what is going on here? Accountability and Transparency are words often spoken these days; they should be taken seriously.

     By contrast, let me note how the California Public Employees Retirement System (CalPERS) does it. In their last Comprehensive Annual Financial Report one finds:
on page 68, a detailed accounting of their Administrative Expenses;
on pages 69-71, a detailed accounting of their Investment Expenses (External Securities Management Fees, Performance Fees, etc., by asset class and by individual manager; and also Investment Consultants);
on pages 72-73, a detailed accounting of their Consultant & Professional Services Expenses.

                            Sincerely,

                            Charles Schwartz
                            Professor Emeritus
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     I never received any response to that letter addressed to Regent Wachter.

     A while later I made another attempt to obtain information about fees via the California Public Records Act.
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 email sent to the Public Records Office at UC headquarters on March 7, 2008:

To: Stella Ngai@ucop.edu
Subject: PRA request

 Stella;

 I have, in the past, made requests for data on the investment management
fees paid out by the UC Retirement Plan; the results of those inquiries
have been confusing. I want to renew that request by reference to a
newly published report from UCOP that gives detailed data on this topic
for the University's endowment funds.

 I refer to "The University of California's Response to the Senate
Finance Committee Regarding their January 25, 2008 Inquiry on
Affordability and Endowments." On page 26 of that document we find,

 "The cost for managing the UC endowments is also fully described in our
Annual Endowment Report. For the current year, the cost of managing the
GEP is 74 basis points. This is comprised of 65 basis points that are
attributable to external money managers, and 9 basis points that are
attributable to our internal costs. These 9 basis points consists of 6
basis points related to administrative costs and 3 basis points related
to investment management and custodial expenses. The weighted average
for all UC endowments for the most recent fiscal year is 81 basis points."

And that is followed by further data, mostly historical.

The numbers given there for the endowment funds are very different from
those I have seen for the UCRP. So my present request is for
authoritative data of this detailed nature for the UCRP.

 Charles Schwartz

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email response on May 16, 2008: 

Hello Professor Schwartz:

 The following is the Treasurer’s Office response to your request:

For the fiscal year ended June 30, 2007, the cost of managing the
UCRP was 36 basis points. This is comprised of 28 basis points that are
attributable to external money managers, and 8 basis points that are
attributable to UC's internal costs. These 8 basis points consists of 5
basis points related to administrative costs and 3 basis points related
to investment management and custodial expenses.

 Thanks for your patience.

 Stella Ngai

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     Let me interpret those numbers in terms of dollars paid out in fees for the management of UCRP.  One basis point (bp) is 1% of 1% of the total fund assets. The total UCRP assets as of June 30, 2007 amounted to $48.1 Billion; so 1 basis point is $4.81 Million.  The official data reported above is then:

Costs attributable to (Fees paid to) external money managers: 28 bp = $135 Million
Costs attributable to UC's internal costs (administrative, etc.):   8 bp = $  38 Million

     How do these numbers compare with data previously published by UC? 

The annual report of the Treasurer of The Regents says (as I noted above in the letter to Regent Wachter) that UCRP had "investment management and administrative expenses" amounting to 4 basis points. That is close to the 3 basis points noted in the recent disclosure.

The annual report of the UCRP (also quoted in the letter to Wachter) tells of "administrative and other expenses" of $34 Million. That is close to the $38 Million (8 basis points) noted in the recent disclosure.

What about the $135 Million (28 basis points) paid out in fees to the external investment managers? I have never before seen any data like this publicly reported by University of California officials!

     In conclusion, I wish to thank U.S. Senators Max Baucus and Chuck Grassley for getting some new data out of this and other universities.