New York City's $2.5 Billion Lesson for Investors
Business + Economy

New York City's $2.5 Billion Lesson for Investors

If it can happen here, it can happen anywhere.

Reuters/Gary Hershorn

Savvy investors know that paying high fees to brokers or fund managers can really eat into their portfolio’s returns. New York City just provided proof of how devastating those fees can be.

An analysis conducted by the city’s comptroller found that over the last 10 years, New York’s five pension funds have paid $2.5 billion in management fees, almost completely canceling out any above-market gains the funds have earned. The pension funds’ investments in stocks and bonds generated returns that topped expectations by more than $2 billion, according to The New York Times. But the analysis found that fees paid to money managers, combined with the weak performance of other investments, left just $40 million for the pension fund.

“When you do the math on what we pay Wall Street to actively manage our funds, it’s shocking to realize that fees have not only wiped out any benefit to the funds, but have in fact cost taxpayers billions of dollars in lost returns,” Comptroller Scott Stringer told the Times.

Related: How Wall Street Is Fighting to Rip Off Your Retirement Money

The comptroller’s analysis comes as other state and municipal public pension funds have been questioning the fees they pay to Wall Street and pulling their investments out of pricey hedge funds. For example, in his first budget address, Pennsylvania Gov. Tom Wolf, a Democrat who took office in January, said his state “has been wasting hundreds of millions of taxpayer dollars on Wall Street managers to handle state pension accounts.” Wolf pledged to stop paying excessive fees.

New York City’s pension system has nearly $160 billion in assets in funds invested for some 715,000 city employees, including police officers, firefighters and teachers, but the same principle applies on the scale of your more modest portfolio: Steep fees and expenses can wipe out solid gains.

Paying even an extra 1 percent a year can really add up over time. Here’s an example from the Securities and Exchange Commission: If you invested $10,000 in a fund that generated a 10 percent annual return and had annual operating expenses of 0.5 percent, after 20 years you’d wind up with $60,858. If the fund carried a higher annual expense of 1.5 percent, you’d end up with only $49,725 — a difference greater than the original sum you invested.

Related: Outrageous Public Pensions Could Bankrupt These States​​​

There’s another lesson here for investors as well: It pays to read the fine print. In the case of New York’s pension funds, Stringer told the Times that the pension funds had in many cases been reporting the investment returns of stock and bond holdings before accounting for those heavy fees. The real performance of those investments could only be gleaned after reading the footnotes in quarterly statements.

So when considering a new investment or looking at the performance of your existing holdings, it’s important to know just what the figures you’re looking at purport to show.

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