The Wall Street Journal had a big front-page story yesterday on how American Federation of Teachers President Randi Weingarten uses teacher pension plans to blackball disfavored Wall Street hedge fund managers. It illustrates a few interesting issues that go against the conventional wisdom about teachers, their unions, and their pension plans:
- With $1 trillion in plan assets, teacher retirement plans have real clout with Wall Street hedge funds. In turn, the unions that staff the boards deciding how to invest that money also have clout. The Journal story gives several examples of times when high-profile Wall Street hedge fund managers responded to Weingarten's calls by changing their private philanthropic giving or even resigning from a nonprofit's board.
- As the story makes clear, public pension plans are huge investors in private equity and hedge funds. What's going on here is Weingarten expressing her preference for certain hedge funds that will kowtow to her political demands; it's not about opposition to all hedge funds.
- This political favoritism raises the question of whether pension plans owe a responsibility to their members and taxpayers to seek out the best return on their investments, regardless of politics. After all, if plan investments suffer, it will be future workers and taxpayers who must fill in the gaps.
- It also raises the question of why teacher pension plans are invested in hedge funds at all. There's compelling evidence to suggest pension plans would be better off making passive investments that track the broader market rather than trying to pick the right investment manager to make the right investments. Investing in hedge funds and private equity also means teachers are indirectly investing in all sorts of odd things. My personal anecdote on this comes from an office building in Rosslyn, Virginia that I occasionally pass on my commute. On a sign outside the building, it proudly proclaims its investors, including the State Teachers Retirement System of Ohio. Do Ohio teachers know they are investing their retirement savings in a skyscraper in Rosslyn, Virginia? They are.
- As I work to raise awareness about teacher pensions, I'm often accused of being a shill for Wall Street and "1 percenters." This is almost exactly backwards. Wall Street as a whole does pretty well under the current arrangement, because they only have to deal with a few union power brokers in order to access a huge market. If states offered teachers individual retirement accounts, each teacher would make her own investment decisions. And, if states structured those plans wisely, the investments would be concentrated in low-fee mutual funds. In an ironic twist, reforming teacher pension plans would help companies like Vanguard that offer cheap, mass-market index funds, and it would seriously harm hedge funds and private equity firms. Unions don't want to admit this, of course, because that transition would diminish their political clout on Wall Street.