Pensions Are Big Business

10 Feb 2018 14:09

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16 months ago I was offered a choice of cashing out my pension or begin receiving a monthly check for the rest of my life. At the time I was 49 and this was a major life decision with retirement 10 to 15 years away.

When I received the final offer in the mail I was shocked at how small the amounts were after working for 29 years at the same company. The buyout was 30% less than I had hoped for and the monthly check option, summed upped annually, equated to 5.6% of the buyout balance. This didn’t exactly seem like a fantastic option and I knew I could match and eventually beat that return with just dividend & interest income. Like any good investor I ran the numbers, developed an investment strategy and back tested the strategy using Portfolio Visualizer and even did a Monte Carlo analysis. Sure enough everything I ran had a greater than 90% success rate so I decided to take the lump sum payout and invest the money in dividend growth equities, real estate, bonds, and preferred stocks.

It took 14 months to invest all the funds which was completed with my last REIT purchase at the start of February. Within this first year of investing I only received 4% dividend income but my forward dividend income for the remainder of 2018 will exceed the pension payout and my forward yield is 5.8% thanks in large part to a full year of dividend income and recent torrent of dividend increases. Going forward it appears my portfolio income will grow at a rate of 4-5% annually, not great but not bad either considering I have non-growth income products like bonds and preferred stocks. If this was so easy to accomplish then why wasn’t the pension paying more? One theory I had was pensions must have high fees so I embarked on an investigation into my State’s pension fund and was shocked to see that Pensions are big business.

The Pension fund I investigated has a total value of $32 billion and generated $867 million in net dividend and interest. That is only a pathetic 2.71% yield. If this wasn’t bad enough, I discovered there was $99 million in investment fees which further reduced the income to $768 million with a yield of just 2.4%. These fees, which do not even include an additional $4 million pension management cost, represents 11.42% of net income. If I add up all of my personal trading and ETF fees it equates to only 0.5% of my dividend income. Holy cow 11.42% is expensive!


A breakdown of the fees revealed that the bulk of the fees are associated with “Investment Advisors” which totaled to $78M. Looking at the list of advisors it was like a who’s who of Wall Street! Just over 70 different advisory firms were there holding their hands out waiting for their annual payment.


This is just one pension fund, if we include all public and private pensions it is not hard to see that this is big business for Wall Street and it all comes at the expense of pension plan participants and in some cases tax payers. In hindsight, taking a lump sum payout was the best option. The ability to invest and control investment expenses is in my hands and after seeing what pension plans pay in annual expenses I’m feeling extremely confident in my decision.

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