Public pension plans that underperform their benchmarks more often wind up paying higher fees across all major asset classes, particularly for such alternatives as private equity and hedge funds, said a report from the Center for State and Local Government Excellence and the Boston College Center for Retirement Research.
The report, "How Do Fees Affect Plans' Ability to Beat Their Benchmarks?" showed that on average, plans that reported better net-of-fee performance relative to their blended benchmark from 2011 to 2016 also paid lower overall fees. And although most plans outperform their blended benchmark, data from the report show a correlation between higher fees and worse relative performance.
Data from the report show that the plans that underperformed their benchmarks from 2011 to 2016 had an average expense ratio of 44 basis points, while those that outperformed their benchmarks had an average expense ratio of 34 basis points. The average expense ratio by asset class for plans that outperformed and underperformed their blended portfolio benchmark from 2011 to 2016 was 111 basis points for alternatives that underperformed, vs. 93 for those that outperformed; 25 basis points for fixed-income strategies that underperformed, vs. 20 for those that outperformed; and 31 basis points for equity strategies that underperformed, vs. 30 bps for those that outperformed.
Looking at expense ratios across the various asset classes, alternatives charge much higher fees than traditional asset classes such as public equities and fixed income.
The lowest fees — averaging 18 basis points across all plans — are for fixed-income investments, while the highest fees — averaging 136 basis points — are for private equity.
The data was taken from a sample of 83 of the largest public pension systems across the U.S.