The Determinants and Opportunity Costs of External Management Fees for State‐Administered Pension Plans
29 Pages Posted: 4 Dec 2018
Date Written: Winter 2018
Private investment firms receive billions of dollars in fees to actively manage the assets held within state pension funds. We examine the determinants of the fees paid and find that more financially burdensome plans tend to pay more. The magnitude of this relationship declines as the size of the plan increases, suggesting economies of scale. These fees do not appear to be associated with higher pension fund returns. Finally, we calculate the opportunity costs of fees and estimate that most pension funds would be better financially positioned today if they had, instead, passively invested the fees in broad‐based market indices.
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