Minnesota Pension Fees Skyrocket 400% Following Forensic Investigation Funded By State Teachers
Under scrutiny, Minnesota pensions reveal an additional $259 million in hidden fees to Wall Street, a total of $344 million annually. That's billions that could be used to improve teacher benefits.
Minnesota’s state pensions massively underreported the investment fees and expenses they paid Wall Street over the past decade, concluded a recent expert forensic investigation commissioned by concerned teachers. Months after the release of the damning investigative findings, the pensions have sheepishly increased the amount of fees disclosed by an astronomical 400%. Apparently, telling the teachers who first exposed the hidden fees would have been too embarrassing for state officials. Worse still, even after the 400% increase, the majority of state pension investment fees remain unreported. That amounts to billions that could be used to improve teacher retirement benefits.
Unprecedented Forensic Investigation Funded by Concerned Teachers
Through a grassroots GoFundMe campaign that commenced on February 25, 2024, thousands of members of the Minnesota Educators for Pension Reform Facebook Group raised funds to commission an independent expert forensic review of the Teachers Retirement Association (TRA) of Minnesota, a state pension fund, on behalf of its participants. According to members of the Facebook Group, the decision to crowdsource an external investigation was driven by a lack of advocacy, transparency, and trust in pension officials.
Since TRA’s $2 billion in assets are managed and held in the name of the $146 billion Minnesota State Board of Investment (SBI), the focus of the investigation shifted early on to the SBI. SBI invests assets for not just TRA but also the Minnesota State Retirement System, the Public Employees Retirement Association, volunteer fire relief plans, state cash accounts of over 400 state agencies, and the non-retirement program that provides investment options to state trust funds and various public sector entities.
Pensions Under “Walz’s Watch”
In Minnesota, Governor Tim Walz is Chair of the SBI board, and Attorney General Keith Ellison is also a member. The AG also serves as legal counsel to the TRA. Six months after the forensic investigation began and immediately before its findings were released to the public, Vice President Kamala Harris surprisingly chose Walz as her running mate. Suddenly, Minnesota pensions under “Walz’s Watch” attracted national attention. While Walz oversaw billions in state pension assets, he revealed he had never owned a stock or bond in his lifetime.
State Officials Attempt to Thwart Investigation Posing “Serious Risks to Reputation of State Pensions”
Internal documents obtained from TRA, SBI, the Minnesota Attorney General and Office of Legislative Auditor in response to public records requests revealed an aggressive, preemptive secretive effort—on the national level, including state pension officials in California, New York, Ohio, Rhode Island and Minnesota, as well as education unions and public pension industry allies—to undermine the participant-funded investigation into potential mismanagement and malfeasance. These efforts began days after the investigation was proposed but before it was even funded. As alarming as the documents provided are, other documents—presumably more damning—were withheld or redacted supposedly under the attorney-client privilege.
On March 11, 2024, Jay Stoffel, the Executive Director of TRA, blasted out an email entitled “An Important Matter” to all trustees of the TRA Board and staff. This same alarming email would, within days, be sent by him to Minnesota state legislators and officials—including the offices of Governor Walz, the Attorney General, and the Legislative Auditor—as well as officials of other states and private industry allies.
A “situation” posing “many serious risks to the agency and pension fund” had arisen, which they “should be aware of and concerned about,” Stoffel wrote.
“I want to update you on the recent crowdsourcing effort of a group of teachers to raise $75,000 to pay… for an investigation… At this point in time, the group has raised $57,259,” warned a nervous Stoffel.
“As trustees of the TRA Board, it is important for you to be aware of and concerned about risks to the agency and the fund, and this situation poses many serious risks. Specifically, TRA’s reputation as a trusted government agency is going to be questioned.”
In short, any potential mismanagement or wrongdoing uncovered through the participant-led expert investigation could have broad implications for the Minnesota state government, including Governor Walz and other pension board members, legislators, the Attorney General, actuaries, and auditors, in Stoffel’s opinion.
However, the specific forms of mismanagement or wrongdoing that Stoffel was concerned the investigation would expose were never delineated by him.
Specific forms of mismanagement or wrongdoing that state officials were concerned the teacher-funded investigation would expose were never delineated.
What were they so worried about?
Equally disturbing, before and during the investigation, state officials and union groups repeatedly contacted organizers of the reform effort to discourage them from continuing the review. State officials and their allies also monitored the Facebook Group and disrupted communications between concerned teachers and national media.
On the other hand, public pension organizations to which TRA and SBI pay membership dues, as well as attend their lavish conferences at luxury venues—the National Council on Teacher Retirement, National Conference on Public Employee Retirement Systems and National Association of State Retirement Administrators—assured state officials that any investigative findings would be a worthless “big pile of opinions” and “lies.” Minnesota officials and their allies organized Zoom meetings with pension officials in other states, fearful of participant-initiated forensic investigations into potential mismanagement and wrongdoing.
Finally, the self-proclaimed Minnesota Center for Fiscal Excellence publicly posted in a blog during the fundraising period:
“"Our prediction right now is that this (investigation) is going to turn up absolute bupkis, and that teachers contributing to this fund are wasting their money... the idea that state pension asset management is a quagmire of inexperience, excessive and hidden fees (emphasis added), conflicts of interest, political shenanigans, and general asset management malfeasance – the types of things that seem to be this attorney’s specialty --is ridiculous.”
Preliminary Investigative Findings Filed With SEC, FBI, and AG
Around July 11, 2024, we filed a whistleblower complaint with the SEC regarding our Minnesota pension findings, forwarded a copy of the complaint to the FBI in Minnesota, and requested a meeting with Minnesota Attorney General Keith Ellison. Once we disclosed that the purpose of the proposed meeting was to talk “about the integrity of the state pensions and financial statements and misrepresentations I have, as an expert, identified and reported to the SEC and FBI,” the AG abruptly canceled the upcoming meeting. (The AG is seemingly conflicted in this matter since he is a member of the SBI board and serves as legal counsel to the TRA.)
Findings of Forensic Investigation Released in the New York Post
On August 10, 2024, the New York Post published an article indicating that the forensic review had already determined that Minnesota pensions were vastly underreporting fees paid to Wall Street investment managers. Neither Governor Walz, Chairman of the SBI, nor TRA returned messages from the reporter.
On September 25, 2024, the findings of the 113-page expert forensic investigation were released.
As noted in the findings:
Each year from 2013 through 2023, the $29 billion Minnesota Teacher Retirement Association’s financial statements disclosed impossibly low and consistent investment management fees paid to Wall Street for managing its assets—less than 10 basis points of total plan assets.
More implausible, as the pension invested a greater percentage of its growing assets to high-cost so-called “alternative” investments, disclosed fees somehow fell and only fluctuated slightly from year-to-year. This is impossible since the fees and expenses related to alternative assets, such as private equity, are well-known to be exponentially greater than those related to traditional stocks and bonds.
The overwhelming majority of Total Investment Management Fees are not disclosed to stakeholders. It appears that only a small percentage—less than 10%—of the total fees have been disclosed…
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 undisclosed private investment fees alone since 2013 amount to an estimated nearly $3 billion.
On October 5, 2024, the New York Post published an article indicating that the state pension investment returns had been inflated, and the fees grossly underreported to make the pensions appear to be doing better than they really were, which included a link to the “bombshell” report. According to the Post, TRA executive director Jay Stoffel and Harris-Walz spokesman Kevin Munoz did not return requests for comment.
Teachers Request “Special Audit” by OLA
Beginning around December 3, 2024, numerous participants in the Facebook Group began filing requests for a Special Audit with the Office of the Legislative Auditor, attaching the 113-page expert report as the “reasonable basis” for such a review. While the OLA acknowledged receipt of the requests, to date it has not indicated whether any such review will be forthcoming. (The OLA is also seemingly conflicted in this matter since the office audits the Minnesota pensions.)
TRA and SBI Now Finally Acknowledge Massive Underreporting of Hidden Fees for Decades
Since the release of the forensic investigation over six months ago, the TRA, SBI, AG, and OLA have neither confirmed nor denied the expert findings regarding massive investment fee underreporting. And while the New York Post twice heralded the startling findings, there has been no local media reporting.
However, it appears that state officials were quietly working, starting months ago, behind the scenes to cover up the long-overlooked, blatant, and embarrassing underreporting errors... or at least make the financial statements a bit more accurate. For whatever reason, state officials sheepishly chose to take partial, limited corrective action without informing the concerned teachers who had alerted them to the massive underreporting of investment fees in the first place and whose retirement security is at risk.
State officials sheepishly chose to take partial, limited corrective action without informing the concerned teachers who had alerted them to the massive underreporting of investment fees in the first place and whose retirement security is at risk.
TRA Revealed Fees Skyrocket 400%, Majority Still Undisclosed
TRA’s Schedule of Investment Expenses for the fiscal year 2024, included in its Annual Report dated December 19, 2024, now indicates total investment expenses skyrocketed over $105 million—a more than four-fold increase.
According to TRA's 2024 Schedule, the pension’s “… financial statements have historically reported investment expenses for management fees for public markets investments.” That is, private markets investment management fees, including any performance fees and expenses, were not disclosed over the past decade. (Full disclosure would have alerted pension stakeholders, including teachers and taxpayers, that the pension’s growing underperforming private investments generated ever-greater fees to Wall Street.)
However, for the fiscal year 2024, immediately following the forensic investigation commissioned by teachers, the TRA, for the first time, listed expenses for investment management fees for all asset class categories, including private markets.
“The investment portfolio of TRA had a fair value of approximately $29.1 billion as of June 30, 2024. The effective investment management expense ratio for TRA’s assets are: public markets program, approximately 0.12% (12 basis points); private markets program, approximately 1.15%; and the effective total expense ratio overall, approximately 0.38% (38 basis points), based upon average quarterly values for Fiscal Year 2024.”
While $105 million is closer to the truth than the $24 million previously reported, performance-based fees related to TRA’s alternative investments, which can be far greater than asset-based fees, and other expenses are still not disclosed. For example, private markets fees and expenses are far greater—more than double—the 1.15% the pension has finally been compelled to reveal. We conservatively estimate that less than a third of the total investment management fees and expenses are disclosed, even at this time. Finally, since the massive underreporting of fees has been ongoing for a decade or longer, the total underreported fees likely amount to billions.
SBI Revealed Fees Skyrocket 400%, Billions Undisclosed
In our September 2024 forensic findings we also noted the $146 billion SBI, Chaired by Governor Tim Walz disclosed in 2023 only a small amount ($83 million) of the total fees it pays Wall Street ($1.3 billion)—i.e., assuming the pension pays overall fees of only 1% annually.
In its 2024 Annual Report, for the first time, the SBI discloses an additional $259 million in private market fees in addition to the $85 million in public market fees, for a total of $344 million. That is, the total fees SBI disclosed skyrocketed 400%, as did TRA’s.
In a footnote, the SBI admits (like TRA): “The SBI has historically reported investment expenses for management fees for public markets.”
However, (unlike TRA) SBI goes on in the footnote to offer the following explanation or excuse for not reporting the totality of fees: “Until recently, it was not practicable for the SBI to separate private market management fees from investment income within the time frame required for inclusion in the fiscal year audit.”
This disclosure raises more troubling questions than it answers.
First, even if the private market fees were not calculated for inclusion in the fiscal year audit, were they ever calculated over the past decade (after completion of the fiscal year audits) so that the board could determine, consistent with their fiduciary duties, that said total fees were reasonable and appropriate? Based upon expert experience, we have no reason to believe Walz or any other board members ever understood the full extent of the management fees and expenses paid by the TRA and SBI.
Getting at the truth should be a simple matter. Teachers could request, under state public records law, disclosure of total investment management fees and expenses for each of the past ten years. If the fees were ever tallied (after the close of each fiscal year) for the TRA and SBI boards to approve consistent with their fiduciary duties, then the calculations should be readily available for participants, whose retirement security is at risk, to review. However, as noted in our investigative findings, SBI and TRA officials consistently declined to provide any of the investment-related documents we requested in connection with our review. Good luck with any Minnesota public records request!
Teachers could request, under state public records law, disclosure of total investment management fees and expenses for each of the past ten years.
Good luck with any Minnesota public records request!
Second, why, immediately following the release of the teacher-funded forensic investigation, did it suddenly become “practicable”—after decades of failing to do so—for TRA and SBI to come closer to disclosing the massive fees to stakeholders? That’s a question the state pension boards, Attorney General Keith Ellison, and Office of Legislative Auditor should be called upon to answer.
Finally, we conservatively estimate that less than a third of the total investment management fees and expenses are disclosed even now. Since this massive underreporting of fees has been ongoing for a decade or longer, the total underreporting likely amounts to tens of billions. The state pension boards, Attorney General, and Office of Legislative Auditor should be grilled about the majority of the rich fees paid to Wall Street that remain undisclosed. What are the true all-in costs of the state pension investments?
Does it matter? Does anyone care? And if it doesn’t matter, why should Minnesota state pensions even bother to release financial statements…. statements which grossly misrepresent their finances? Lack of financial statements would at least put teachers and taxpayers on notice that the financial integrity of the funds is questionable.
Similar to Rhode Island under Gina Raimondo’s so called pension reform that eliminated COLA and increased pension management fees from ten million to 189 million yearly coupled with transfer of pension assets to hedge funds. Imagine losing your COLA years after you have retired. Politicians must take seminars on how to implement this .