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Wall Street Fees And Investment Returns For 33 State Pension Funds

Wall Street Fees And Investment Returns For 33 State Pension Funds by Jeff Hooke And John J. Walters, The Maryland Public Policy Institute


This study outlines fees and investment returns for state pension funds with fiscal years ending June 30, 2014. The study concludes that pension funds with the highest fees, as a percent of assets, recorded inferior investment returns, on average, versus those in states with the lowest fees. This conclusion contradicts the assumption that Wall Street advice helps clients achieve superior returns.

The study also shows that a passive index that mimics the investment allocation of the typical state pension fund outperformed the peer group median by 1.62 percent per year over a five-year period. On an initial $50 billion pension fund, this difference over five years is equivalent to $6.8 billion in foregone income.

In this report, the Maryland Public Policy Institute updates calculations completed two years ago for the fiscal year ending June 30, 2012. The conclusions then are identical to those today—more fees equal lower returns. Neither state pension fund trustees, pension fund executives, nor investment management industry executives contested the findings of the earlier study, which were reasonably publicized.

Higher Fees Mean Lower Investment Returns

The top 10 states in terms of Wall Street fees had lower pension fund investment performance over the last five fiscal years than the bottom 10 states. See Table 1. Note that returns are expressed as “net of fees.”

Indexing Could Save Pension Funds Tens Of Billions

Instead of using the approach of active management, state pension funds should consider indexing. Indexing fees cost a state pension fund about three basis points yearly on invested capital versus 66 basis points for active management fees...