Chat GPT In Seconds Shreds Years Of Minnesota State Pension Fee Disclosures
Chat GPT In Seconds Shreds Years Of Minnesota State Pension Fee Disclosures
For over a decade, the investment fees Minnesota’s state pensions disclose they pay Wall Street have held steady at an unbelievably low 6 basis points. "Unlikely," concludes Chat GPT in seconds.
The forensic investigation of Minnesota’s state pensions—the Minnesota State Board of Investment (SBI) and the Teacher Retirement Association (TRA)—commissioned by thousands of concerned teachers was completed in late September. The findings included that the investment fees the pensions disclose they pay to Wall Street were grossly underreported annually. The overwhelming majority of such fees—billions—were not disclosed to stakeholders. Below is the finding from the 110-page report and expert analysis behind it, followed by an analysis by Chat GPT:
TRA’s Billions in Undisclosed Investment Fees
In terms of disclosed investment management fees, each year for the past 11 years TRA’s financial statements indicate a remarkably low and consistent amount—less than 10 basis points of total plan assets. More implausible, as the pension has invested a greater percentage of its growing total plan assets in high-cost alternative investments—an increase from $2.7 billion to $6.6 billion—disclosed fees have fallen and only fluctuated slightly from year-to-year. This is unbelievable since the fees and expenses related to private assets are well-known to be exponentially greater than those related to traditional assets. (Private funds annually charge substantial asset-based fees of approximately 2%, as well as performance fees of 20% or more.)
We note that a comprehensive study of 54 public pensions from 2008 to 2023 shows fees average 1 percent of assets under management. By that metric, TRA with $28 billion in assets would be expected to pay over a quarter billion dollars a year in fees to fund managers.
In our opinion, it is apparent that total investment management fees and expenses are grossly underreported annually by both TRA and SBI. The overwhelming majority of such fees are not disclosed to stakeholders.
It appears that only a small percentage—less than 10%—of the total fees have been disclosed to the public.
For example, in 2023, the Combined Funds invested approximately 25%, or $6.675 billion of TRA’s investment portfolio in private investments. Yet, for the year, TRA reported Total Investment Management Fees of only $24 million. How great were TRA’s estimated private equity fees alone in 2023?
Our forensic investigations routinely uncover total fees related to alternative funds and fund of funds in the 7-10 percent range.
Thus, assuming private investment all-in fees range from 5% to 7%, Total Investment Management Fees related to TRA’s private equity funds alone in 2023 range from an estimated $334 million to $467 million.
The undisclosed private investment fees in 2023 alone—in a single year— substantially exceed all fees disclosed by the Fund since 2013 ($262 million).
Total TRA undisclosed private investment fees alone since 2013 amount to an estimated nearly $3 billion.
SBI’s Tens of Billions Undisclosed Investment Fees
Assuming SBI’s private investment all-in fees range from 5% to 7%, fees related to its private equity funds alone range from an estimated $1.7 billion to $2.4 billion annually.
Over the past decade-plus, we estimate tens of billions in undisclosed private investment fees have been paid by TRA and SBI to Wall Street.
So—just for fun—I recently asked Chat GPT:
If you invest 25% of your money in private equity and the remaining 75% in traditional funds, can your overall fees be only 6 basis points?
In seconds, Chat GPT responded:
To determine if your overall fees can be 6 basis points (0.06%) when investing 25% in private equity and 75% in traditional funds, you need to consider the typical fee structures for each type of investment.
Private Equity Fees: Private equity funds often charge higher fees, typically around 1.5% to 2% management fees, plus a performance fee (often 20% of profits). For example, if we assume an average of 1.5% management fee, the effective fee on the 25% invested in private equity could be around 1.5% of that amount.
Traditional Funds Fees: Traditional mutual funds or index funds usually have lower fees, often ranging from 0.1% to 1%. If we assume an average fee of 0.5% for the 75% invested in traditional funds, the effective fee would be 0.5% of that amount.
To calculate the overall fee:
Private Equity Contribution: 0.25 * 1.5% = 0.375%
Traditional Funds Contribution: 0.75 * 0.5% = 0.375%
Now, sum these contributions to get the overall fee:
Total Fees: 0.375% + 0.375% = 0.75%
As you can see, the overall fee of 0.75% significantly exceeds 6 basis points. Therefore, it would be unlikely to achieve an overall fee of only 6 basis points with that allocation unless the fees for both asset classes are exceptionally low, which is uncommon in practice (emphasis added).
In conclusion, it’s obvious the fees Minnesota’s pensions disclose to the public are grossly understated. Even Chat GPT’s quickie analysis—which does not include performance and other myriad fees private investments charge—immediately reveals the disclosed numbers are far too low to be believed. Expert analysis will reveal multiple layers of additional fees—including potentially illegitimate fees, given the prevalence of industry abuses—related to many of the investments. Again, private equity fund fees are not 1.5% as Chat GPT conservatively estimates— they exceed 5%.
So, the huge unanswered question is: How did the pensions, their auditors, lawyers, investment professionals, public stakeholders and state media somehow manage to overlook or hide—for decades—the obviously greater true fee amounts in an apparent brazen effort to make the costs look lower than they really were?