Sun Investigates

New law requires Maryland pension system to disclose millions in fees paid to Wall Street firms

A new Maryland law requires greater transparency in disclosing millions in fees paid by the state’s pension system to Wall Street investment firms. Democratic Del. Kumar Barve of Montgomery County, shown in this 2017 file photo in Annapolis, sponsored the legislation this year.

A new Maryland law requires greater transparency in disclosing millions of dollars in fees paid by the state’s pension system to Wall Street investment firms.


The Maryland State Retirement and Pension System has reported paying about $370 million annually in fees to the firms that invest its $51 billion in assets.

But the real amount of fees paid is anywhere from $460 million to $570 million. That’s because so-called “carried interest fees” — a cut of the Maryland fund’s profits that goes to the outside investment managers — have not been not disclosed publicly.


That’s about to change.

Del. Kumar Barve, a Montgomery County Democrat, sponsored legislation this year to demand greater transparency, in part because he thinks the state is getting a bad deal.

“You, me and every member of the public can invest and get better returns while being charged lower fees than the state of Maryland,” Barve said.

Baltimore County Republican Del. Robin L. Grammer Jr. was the bill’s other lead sponsor.

At one point, the legislation sought to cap the amount of fees the firms could charge the pension system, but it was amended to become a bill requiring greater disclosure. Both chambers of the General Assembly passed the revised bipartisan legislation unanimously and Republican Gov. Larry Hogan signed it into law.

The pension system now must publicly disclose the amount it pays in carried interest fees by the end of each calendar year. The first report, due Dec. 31, will include the fees from fiscal years 2015 through 2019.

The pension system says it administers retirement benefits, as well as death and disability benefits, for more than 405,000 retired and current state employees, teachers, judges, state troopers and other law enforcement officers.

Barve argues the pension system needs reform because Maryland’s pension fund has underperformed passive index funds — costing the state about $5 billion in gains over 10 years that he says it’s missed out on. At the same time, fees the state has paid to dozens of Wall Street firms, which actively manage investments from the state pension system, have totaled more than $3 billion, Barve says.


Jeffrey Hooke, a senior lecturer at the Johns Hopkins Carey School of Business who co-wrote a report on the state pension fund for the Maryland Public Policy Institute, argued that the hundreds of millions in fees charged each year to the state could be used for better purposes — such as funding public schools.

Hooke estimates that Wall Street firms receive about $200 million a year from Maryland through carried interest fees; the state pension system puts the number closer to $90 million annually.

“It seems to me there is an opportunity to save a ton of money,” Barve said in February when he and Hooke testified for the bill in Annapolis.

“The public is not really aware of how much money we have been wasting to pay these fund managers,” said Carol Park, a senior policy analyst at the Maryland Public Policy Institute, a conservative think tank.

R. Dean Kenderdine, director of the state pension system, and Andrew C. Palmer, the system’s chief investment officer, testified in February against capping the fees. Both argued capping the fees would disincentivize Wall Street managers from bringing in higher returns for Maryland’s pensioners.

“The bill limits the system’s ability to generate better returns,” Palmer said.


Kenderdine and Palmer testified, however, they had no objection to disclosing the fees to increase transparency.

Maryland is part of a trend of states requiring greater transparency in their pension systems. In recent years, the California Public Employees’ Retirement System and the Pennsylvania Public School Employees’ Retirement System have released reports showing carried interest earned by the Wall Street general partners managing investments on their behalf.

In its first report, California reported $700 million in carried interest payments to investment firms in fiscal year 2015.

The Maryland bill became law July 1.