Fees Negatively Correlated With Public Plans’ Ability to Meet Benchmarks

A new analysis of public pension investment performance finds that plans with higher fees are associated with lower net-of-fee performance relative to benchmarks.

Also, according to a brief from the Center for State and Local Government Excellence (SLGE) and the Boston College Center for Retirement Research (CRR), “How Do Fees Affect Plans’ Ability to Beat Their Benchmarks?” those plans that underperform their benchmarks pay higher fees across all major asset classes—particularly for alternative assets such as private equity and hedge funds. 

“We are seeing an increased focus on fees related to the investments of public pension funds by a range of stakeholders. To have an informed, data-driven conversation on the topic, this study provides a comprehensive analysis of the benchmarks plans use for different asset classes, how plan investment performance aligns to these benchmarks, and any relationship between investment fees and actual returns,” says Joshua M. Franzel, PhD, president and CEO of SLGE.

The analysis isolated the impact of fees on performance to assess each plan’s ability to meet its stated asset-class benchmarks and found public pensions plans are not uniform in their asset-class benchmarks—some use publicly quoted indices, others use indices that capture the performance of narrow asset classes such as private equity, and some use custom benchmarks. Most plans outperformed their blended portfolio benchmark over the long term regardless of the benchmarks for each asset class. But the data show a correlation between higher fees and worse relative performance.

Alternative investments charge higher fees than traditional asset classes such as public equities and fixed income, and according to the study, these fees, in particular, may play a meaningful role in plan underperformance. In general, plans that underperformed their blended benchmark from 2011 to 2016 reported higher expense ratios than plans that outperformed their benchmark, particularly within alternative asset classes.

“As our Public Plans Database is expanded, it will be important to track whether these trends hold over the longer term and with additional benchmark and plan investment data,” Franzel says.