$6 Million Bonus for VRS Staff — Justified or Not?

piles_o_cashby James A. Bacon

The Virginia Retirement System (VRS) has awarded $6 million in incentive pay to its internal investment team, raising the issue of whether the Commonwealth of Virginia is creating a caste system of “haves” and “have nots” in its workforce.

The VRS Board of Trustees approved the incentives yesterday, reports the Richmond Times-Dispatch, even though the VRS portfolio generated a return on investment of only 1.9% in fiscal 2016, far short of the 7% long-term goal. The bonus was justified, VRS officials contended, because the pension fund’s internal investment team out-performed the 1.3% return of its benchmark.

As Chief Investment Officer Ronald D. Schmitz explained, the internal team has generated an average of $289 million a year over the benchmark over the past decade, while also saving $26 million in fees to Wall Street investment managers. “A $6 million bonus versus a $300 million gain seems like a pretty fair gain to me.”

However, as the T-D’s Michael Martz observes:

The timing of the investment awards also is awkward, as the state grapples with a projected $1.48 billion revenue shortfall that already has wiped out scheduled raises for state employees, college faculty and school teachers, and state-supported local employees, including sheriff’s deputies.

“State agencies and institutions that charge tuition, sell lottery tickets, license businesses and manage employee pension plans are free to use those funds to give employee pay raises,” said R. Ronald Jordan, executive director of the Virginia Governmental Employees Association. …

“Treating employees based on agency revenue source has resulted in tremendous pay disparity and a system of agency “haves” and “have nots.”

Bacon’s bottom line: Jordan has a point, and it’s understandable why state employees would be demoralized. But what’s the solution? Should we stop rewarding VRS investment professionals for superior performance, a standard practice in the financial services industry? If the internal team can save tens of millions of dollars, doesn’t everyone come out ahead? The alternatives — letting top performers get snatched up by the competition, or settling for sub-par performance by highly paid Wall Street money managers — will only increase the financial stress on the Commonwealth and make it more difficult to raise employee salaries in the future.

I made a similar argument yesterday: Paying top dollar to hire top talent to run the state’s IT services will lead to better decisions that save the state money. State government needs to reward the people in critical functions who do superior work. The alternative is to be “fair” but broke.

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5 responses to “$6 Million Bonus for VRS Staff — Justified or Not?

  1. These days, there is a lot of sentiment for ditching the professional stock pickers in favor of allocators. This is not new, but dates back at least as far as the premise proposed and proved by my old Econ 101 professor, Burton Malkiel (A Random Walk Down Wall Street). Why should we pay 1% in fees every year when we can probably do it for 20 basis points or less.

  2. Correct! Intelligently-overseen allocation, by a professional team whose salaries are spread over a huge base and therefore de minimis to any individual fund participant, is what mutual funds were invented for. It’s demonstrably true that the better broad-based mutual funds do as well as, or better than, the results of just about any in-house professional investment team you can hire. So why not ride with the mutual fund managers’ picks at the simple cost of mutual fund entry with no additional charge? That should cost at least as little as 20 bp (0.20%) to the State; given the size of their investment they have the leverage to cut an even better deal. What is it that demands reinventing the wheel when it comes to investing pension funds?

  3. How about the UVA strategic fund that seemed to do so well… was that “allocation”?

  4. >>”seemed to do so well” This sounds like a hedged question. Can you tell us what the results were and over how long a period? Are you saying that they actively picked stocks and other instruments. I’m willing to listen for the sound of a unique individual who is able to “beat the market” consistently over a very long period (not talking 6 months here, which is what lots of Wall Street folks call “long term”) I would commit all of my funds to him. But he better really consistently show gains in my portfolio for the in-excess-of-100-basis-points fees he will want to charge ( In addition to whatever 12b6 fees are charged)

  5. well no.. I’m asking how UVA did their fund…. that was reported to have “done well”.

    I’m familiar with “allocation”… I’m assuming that if you have your own “on site” analyst that you might get better insight that the “generic” faceless ones that provide “allocation” advice…

    or do you think “allocation” is some sort of natural process that you just pay close attention to? 😉

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