Take the numbers you've used and switch them around slightly to reflect the NYC pensions situation and you can see why they'd be upset. It's not $4 in fees to an additional $96 returned to the client, it's $2billion in fees versus an additional $40m. Scaled back to your example that'd be like hiring a guy who gets you $200, keeping $98 for your $2.

That would be incorrect. I just used numbers that weren't reflective of the article.

To keep (dumbly) using my simple numbers, while still using their percentages, it would be more like this:

You could get $100 by using an index, but instead, you hire a guy who gets you $103 for not using an index, then charge you a $2 fee, leaving you with a "profit" of $1.

At the end of the day, the fund recipients still come out ahead, just not as much ahead as if the managers charged no fees. If you can figure out a way to get people to work for free, and do a good job on top of it, then you'll have surely cracked the code (or reinvented slavery). Until then, it's hard for me to demonize a money manager who charged two percent over ten years, even if it was two percent of a very large number.

No, this is the section of the article he was referring to: "Actually my simple dumb model for investment management fees is that managers should, on the whole, charge more than the value they add, since (1) good managers who add value should charge fees equal to the value they add, (2) bad managers who don't add value should charge fees equal to the value that the good managers add, and (3) there are at least as many bad managers as good ones. So I think New York's pensions are doing rather well in getting the managers to give up any of their outperformance."

The way this reads to me is that his idea of an actively managed fund should either match index performance after fees (in the case of a good manager) or perform worse after fees (in the case of a bad manager). In which case, you'd be better off sticking with index funds instead of betting on whether or not you have a good manager.

To put it into your example: The S&P 500 has returns of 5% for the year of 2020. Guy_A has his investments managed by Investor_Good who gets gross returns of 7%, but charges fees that leave Guy_A with 5% net returns (~1.87% management fee). Guy_B has his cousin Investor_Bad manage his scratch-off earnings who ends up matching the index with gross returns of 5%, but charges the same fee as Investor_Good leaving Guy_B with net returns of 3.04%.

Edit: I just wanted to add that this is how the how situation (not the NYC Pension, but the quoted section) sounds to me. Finance is not my area of expertise, so I could be misinterpreting something.