Pennsylvania Treasurer Joseph M. Torsella is custodian of state funds totaling more than $100 billion. In a wide-ranging interview last week, Torsella, who took office in January, discussed his priorities for the coming year.
College savings accounts. Helping Pennsylvania's youth earn a postsecondary education can be made easier with savings accounts started at an early age. Torsella has proposed giving $50 to all babies born in the state. Known as Keystone Savings Accounts, his plan would complement the current college-savings program, known as a 529 plan after the relevant section in the tax code. Unfortunately, only 4.5 percent of eligible families use 529 savings plans.
"Keystone Accounts are built on the idea that if a kid has a savings account at or close to birth, the odds of that child going to college grow seven times. The amount saved seems to make no difference," he said. Moreover, "having that degree means your lifetime income goes up as much as $1 million. We're changing the pattern of college attainment and financial literacy."
The state Treasury is developing a pilot program to provide a "modest" amount for every child born, he said. Families would "opt in" to claim those accounts. Nevada has a program offering $50 per account. Maine offers $500.
"Say we started at $100. That means with 150,000 children born each year in Pennsylvania, the statewide cost would be at almost $15 million" without claims on the general government funds, he said. "I would argue that's a modest investment in a different future."
Portable pensions. About 44 percent of the state workforce, or roughly two million people, "have no way of saving for retirement in the workplace, a huge cohort of Pennsylvanians with no assets outside of Social Security," Torsella said. "We're talking to stakeholders and the legislature about what a Pennsylvania state plan [for portable pensions] could look like."
Personally, he said, "I'd like to offer low-cost index funds with an opt-out, so this has no burden on business. That makes the life of the small business easier. The cost of setting up a 401(k) for a small business is a lot of the reason" Pennsylvania's private-sector workers don't have retirement accounts.
Lower pension fees. Torsella serves on about 20 boards on the Treasury's behalf, with seats on the state's largest investment funds — the underfunded state workers (SERS) and teachers (PSERS) pension systems.
What steps will he take to streamline money management at those two funds? Gov. Wolf has said SERS and PSERS should replace their private managers with indexed and state-employee investments. That would require support from legislators and retiree groups also represented on the boards.
"I could not be more convinced the variable most within our control is investment fees," Torsella said. "Treasury is leading the way in the consolidation of three separate state funds, plus three insurance-related funds. They're being consolidated under Treasury. We are pursuing either in-house or low-cost external index investing and expecting to save $6 million a year in management fees."
For both SERS and PSERS, the current annual expense ratio is 0.78 percent, he estimated. "We need to take an eagle-eyed look at costs and move more into passive investing."
What about merging the two systems? "That's a separate issue. We don't need to merge anything to save money. In principle, we've endorsed the idea of consolidating the support functions and investment-staffing functions and consulting. Do we really need two totally different back-of-house operations, interviewing the same consultants, the same managers? The answer is no, we could do better."
As for investment strategy, "the idea that funds this large are going to somehow find a mythical way of routinely beating the market is misguided, and that effort has in Pennsylvania led us down some unpleasant paths."
"I'm recommending we move much more in that direction [of indexing]. There's always going to be a place for certain kinds of investments that don't lend themselves to passive" investing. But in equities, for example, "that's the clearest cases where you just can't say with a straight face you can count on beating the market."
PSERS already does a lot of equity investing passively in-house. SERS does not, he said.
"We manage about $17 billion, and our fees to do that last year totaled $12.4 million – that's a very small amount. Some we internally manage passively."
For Torsella, that $12.4 million can go lower.