Monday, December 30, 2013

Great Op-Ed by SEANC regarding North Carolina Retirement System

Great Op-Ed in Raleigh's News and Observer by Ardis Watkins of the State Employees Association of North Carolina (SEANC):  
"The Truth About the Underperforming NC Retirement Fund"

Monday, December 23, 2013

It Appears the North Carolina State Treasurer is in Violation of G.S. 147-68

The North Carolina State Treasurer is required by law (G.S. 147-68) to make quarterly reports to the State Legislature.  These quarterly reports have always been posted to the Treasurer's website (click here and see the bottom of the page).  However, no reports have been posted since December of last year (2012).  It appears the Treasurer is fully three quarters behind in complying with the law, and will soon be a full year behind in her quarterly reports.

 These "Government Investment Operations Reports" (commonly referred to as the "Gov Ops Reports") are the only place investment expenses are ever reported for the North Carolina Retirement System (NCRS) pension fund.  Most notably, these reports include the amounts paid to external investment managers.  

These expenses are not even reported in the so-called "Annual Report" of the Treasurer - which is completely ridiculous.  If expenses are not reported in a Treasurer's Annual Report, why have the report at all?  There are plenty of happy pictures of the Treasurer and staff in the Annual Report, but not a single page that I would consider a "financial statement."  In the most recent Annual Report (18-month old data as of 6/30/2012), a single page (p. 100) contains one simple summary table which is the only list of expenses to be found in the entire report.  No details what so ever, just one summary table.  And, this lone table of expenses does not even include a comparison to last year's expenses.

MOST IMPORTANT, the one table of expenditures buried on page 100 of the Annual Report DOES NOT include ALL of the Treasurer's or NCRS departmental expenses.

Monday, December 16, 2013

North Carolina Retirement System Pension Fund Should Index

Last week I blogged about how bad North Carolina's pension investment returns have been.  This week, I thought I'd point out a simple solution to the poor performance.  A simple portfolio of Vanguard Index Mutual Funds not only would beat the performance of North Carolina's pension, but has outperformed more than 75% of all public pensions over the past 3, 5, and 10 year periods. (Click here and see page 4 for investment returns of all public pensions). 

North Carolina Pension Investment Returns as of 9/30/2013





North Carolina Pension




Median Public Pension




Passive Index Mutual Funds*




NC Under-performance vs. Index Funds




NC Tax-payer cost for under-performance

Why all pensions don't index is a mystery to me?  North Carolina’s pension at $83 billion, like many public pensions, are so large, it's inconceivable that their 240+ external managers could collectively outperform "the market."  It is ridiculous – and expensive – for them to even try. 

Thursday, December 12, 2013

North Carolina Pension Investment Performance is Bad, Again

North Carolina Treasurer Janet Cowell recently released North Carolina’s pension investment returns.  As usual, the press release did not provide any relevant point of reference as to whether the returns were “good” or “bad” other than to compare them to an obscure, undefined, and obviously cherry picked benchmark.  On the surface, it would appear the returns are “good” since every return for every time period was higher than this mysterious, ever changing, self-managed and self-serving “benchmark.”

I thought I’d compare North Carolina pension investment returns to the average public pension returns as published by The Bank of New York Mellon Public Pension Universe (click here and see page 4).  Glancing at the table below, I believe the word “bad” adequately describes North Carolina’s pension investment performance.  Over any time period one wishes to compare, the North Carolina pension investment performance lags the median public pension returns.

North Carolina Pension Investment Returns as of 9/30/2013




North Carolina



Median Public Pension







Just to put the last year’s investment performance in perspective, if the $83 billion North Carolina pension merely had average returns, the pension would have earned an extra $2 billion. This is roughly the equivalent of 10% of the entire North Carolina state annual budget!  Or, this $2 billion short fall is roughly the equivalent of 20% of the entire state's annual spending on education. 

If you are a state employee or teacher and you are upset about budget cuts and a lack of raises, just imagine what the state of North Carolina could do with an extra $2 billion. That could be a reality if only your pension investments could achieve “average” returns.

Thursday, December 5, 2013

Same-Sex Marriage and Tax Return Filing Status in North Carolina

The Internal Revenue Service (IRS) now allows same-sex married couples to file a "married filing jointly" tax return.  However, many states do not allow these couples to file using the "married filing jointly" status.  My home state of North Carolina recently released a directive for these couples outlining how to file.  You can read the full directive by clicking here

These couples will file their federal tax return using the "married filing jointly" tax status, but will also need to recalculate a separate "pro forma" federal tax return under the single status for each individual (or head of household as the case may be).  Both will need to file separately with North Carolina and attach a "pro forma" federal tax return to their state tax return.  

Thus, these couples will need to fill out a total of 5 income tax returns:

1 - Federal income tax return submitted to the IRS (Married)
2 - Federal income tax returns submitted to the North Carolina Department of Revenue (Single)
2 - State income tax returns submitted to the North Carolina Department of Revenue (Single)

Please feel free to send me your questions on this or any other topic at:  InvestorCookbooks(at)

Tuesday, November 19, 2013

The North Carolina Tax Deduction for 529 Plan Contributions Expires 12/31/2013

When the new Republican-controlled North Carolina State Legislature overhauled our state's income tax, they removed the deduction for 529 plan contributions after 2013. 

See page 5 of the updated NC 529 Plan Program Description.  However, you still have six weeks to save up to $387 for 2013 contributions ($5,000 contribution for married couple filing jointly in the top income tax bracket).  See how much you can reduce your 2013 North Carolina state income taxes by clicking here.     

See my 529 plan post from last year for more general info on 529 education savings plans.

Wednesday, October 23, 2013

State Pension Fund Returns Ranked for 10-years Ending 6/30/13

As a follow up to my previous three posts on September 22October 12, and October 18 I've ranked our US states by pension fund investment returns.  I found 10-year investment returns for 34 of 50 state pension funds and ranked them as of June 30, 2013.  

The Wilshire TUCS median return for public pensions for ten years is 7.4%.  

As is typical, my home state of North Carolina can be found near the bottom of the table with a 6.6% 10-year annualized return.  Using a basic time value financial calculator, I estimate North Carolina's under-performance versus the median public pension return has cost tax payers approximately $6 billion the past 10 years.

Rank State Return
     1 WA 8.3%
     2 LA 8.2%
     3 MA 8.1%
     4 KS 7.9%
     5 ID 7.9%
     6 IA 7.8%
     7 PA 7.7%
     8 IL 7.7%
     9 VA 7.6%
    10 NY 7.5%
    11 WV 7.5%
    12 FL 7.4%
    13 RI 7.4%
    14 AZ 7.4%
    15 MI 7.4%
    16 NJ 7.3%
    17 TX 7.2%
    18 CA 7.2%
    19 NH 7.2%
    20 NE 7.2%
    21 MS 7.2%
    22 VT 7.1%
    23 ND 7.1%
    24 ME 6.9%
    25 NV 6.8%
    26 MO 6.7%
    27 KY 6.7%
    28 MD 6.6%
    29 MT 6.6%
    30 NC 6.6%
    31 NM 6.4%
    32 TN 6.2%
    33 IN 5.9%
    34 SC 5.0%

Friday, October 18, 2013

State Pension Fund Returns Ranked for 3-years Ending 6/30/13

As a follow up to my previous two posts on September 22 and October 12, I've ranked our US states by pension fund investment returns.  I found 3-year investment returns for 39 of 50 state pension funds and ranked them as of June 30, 2013.  

The Wilshire TUCS median return for public pensions for three years is 11.5%.  

As is typical, my home state of North Carolina can be found 4th from last in the table.

Rank State   3-yr Return
     1 MN 13.0%
     2 MS 12.7%
     3 IL 12.6%
     4 AZ 12.6%
     5 NH 12.4%
     6 KS 12.2%
     7 MT 12.1%
     8 DE 12.1%
     9 NE 12.0%
    10 GA 12.0%
    11 NY 11.9%
    12 LA 11.9%
    13 MI 11.9%
    14 OR 11.9%
    15 MO 11.8%
    16 NV 11.8%
    17 CO 11.7%
    18 TN 11.6%
    19 FL 11.5%
    20 TX 11.4%
    21 NM 11.4%
    22 WA 11.3%
    23 ND 11.3%
    24 MA 11.3%
    25 CA 11.3%
    26 IA 11.1%
    27 ME 11.0%
    28 RI 10.6%
    29 NJ 10.6%
    30 VA 10.5%
    31 VT 10.5%
    32 PA 10.4%
    33 ID 10.2%
    34 AK 10.2%
    35 MD 10.0%
    36 NC 9.9%
    37 KY 9.8%
    38 SC 9.3%
    39 IN 8.4%

Saturday, October 12, 2013

State Pension Fund Investment Rankings 2013

As a follow up to my previous post on September 22, I've ranked our US states by pension fund investment returns.  I found 1-year investment returns for 47 of 50 state pension funds and ranked them as of June 30, 2013.  

In the table below, you can click on the state abbreviation to link to the pension fund website. You can also click on the return figure to reach the source document for the reported returns. 

Rank State Return
     1 SD 19.5%
     2 AR 15.6%
     3 NH 14.5%
     4 MN 14.2%
     5 KS 14.0%
     6 OH 13.7%
     7 ND 13.5%
     8 MS 13.4%
     9 GA 13.3%
    10 NM 13.3%
    11 IL 13.2%
    12 FL 13.1%
    13 AZ 13.1%
    14 MT 13.0%
    15 WV 12.8%
    16 MA 12.7%
    17 NE 12.7%
    18 OR 12.7%
    19 LA 12.6%
    20 MO 12.6%
    21 CA 12.5%
    22 NV 12.4%
    23 WA 12.4%
    24 NY 12.3%
    25 MI 12.2%
    26 HI 12.0%
    27 OK 12.0%
    28 VA 11.8%
    29 NJ 11.8%
    30 CT 11.5%
    31 WI 11.2%
    32 DE 11.1%
    33 ME 11.1%
    34 RI 11.1%
    35 KY 11.0%
    36 AK 10.9%
    37 CO 10.6%
    38 MD 10.6%
    39 TX 10.2%
    40 IA 10.1%
    41 SC 10.0%
    42 TN 9.9%
    43 NC 9.5%
    44 ID 9.1%
    45 VT 8.8%
    46 PA 8.0%
    47 IN 6.0%

Returns for Alabama, Utah, and Wyoming were no where to be found. 

Sunday, September 22, 2013

North Carolina Retirement System Returns Lag Median Pension Returns BADLY

The North Carolina Retirement System (NCRS) return of just 9.5% for the fiscal year ending June 30, 2013 lagged the median pension plan very badly according to an analysis by Pensions & Investments Magazine and Wilshire's Trust Universe Comparison Service (TUCS).  The median large public pension earned returns of 12.6% for the year ending June 30, 2013, or 3.1% higher than NCRS.  Considering the NCRS plan is approximately $81 billion, the 3.1% of under-performance translates into $2.5 billion in lost returns for 2013.  

Median Pension Return = 12.6%
NCRS 2013 Return = 9.5%
Difference = -3.1%
NC Tax Payer Cost = $2.5 Billion 

Friday, September 13, 2013

Fido Bites The Hand That Feeds Him

Fidelity Investments EMPLOYEES are suing FIDELITY for breach of fiduciary duty by repeatedly adding "high-fee, actively-managed Fidelity mutual funds" with "little or no track record" to the Fidelity 401(k) plan.  Do I really need to explain how funny this is?  

The lead plaintiff and former employee, Lori Bilewicz, invested in the Fidelity Freedom 2040 fund within the Fidelity 401(k).  The class-action complaint by 26 current and former employees relates closely to my most popular blog post of all time from 2/15/2012: Fidelity Freedom Funds Aren't "Free" But Are "Dumb".  I would suppose any 401(k) plan using the Fidelity Freedom Funds will be interested in the outcome of this lawsuit. 

You can find more information about the lawsuit by clicking here.  
You can read the actual lawsuit complaint by clicking here

Friday, August 23, 2013

A couple of my favorite podcasts

Listening to Podcasts isn't a new thing, but it is new to me.  I love to listen to "Freakonomics Radio" (once a week) and "The Clark Howard Show" (daily).   Both are informative and entertaining and FREE.

"The Clark Howard Show" is an awesome personal finance show that I have been listening to on 850 AM radio in Raleigh every day between 1-3 PM.  But, I can't always listen at that time. So, now I just listen whenever I want via his podcast that I download to my smart phone.  

I loved the books, "Freakonomics" and "Super Freakonomics" by Steven Levitt and Stephen Dubner and was thrilled when I recently discovered "Freakonomics Radio".  

Thursday, August 1, 2013

More truth about Hedge Funds

It seems it is becoming more popular to bash hedge funds in the media - and rightly so.  Hedge funds are unregulated, expensive, black boxes that rarely deliver market-beating returns.  I just wish the people that control other people's money would listen.  Click here to read another great article by Ted Siedle of Forbes magazine.  Every pension fund manager in America should read Ted's article.    

Hat tip to JM

Thursday, July 25, 2013

Bonds are the only safe haven in times of economic stress

     When the NC House passed Senate Bill 558 last night, the proponents of the bill said the North Carolina Retirement System pension fund needs to sell a huge chunk of its bond portfolio and put more into alternative investments and real estate.  I guess the folks that want this bill have very short memories.  They have obviously forgotten that during periods of economic stress (2008 for example) the only true safe haven is bonds.  

     Not even heaven will be able to help the NCRS pension fund during the next economic stress test if S558 becomes law and our state treasurer sells much of the bond portfolio as she plans.  It is mathematical fact that if you don't own bonds, your portfolio will be decimated during economic stress.  Here is a quick reminder of how ugly it can get.
How quickly we forget.

The chart below from a recent Vanguard analysis further drives home the point that selling bonds from a portfolio in favor of ANY other asset class raises the risk profile of the portfolio.