Public pension funds paying wide range of fees for similar index strategy mandates – report

Fees paid by U.S. public pension funds for similar index strategies show a surprising amount of dispersion, evidence that some need to revisit their terms, according to a new report from Nasdaq eVestment.

The research firm utilized data from the firm’s Peer Benchmarking and Market Lens databases to analyze the dispersion of fees among index strategies and found some level of dispersion in the fees paid among all indexes analyzed, according to the report, “Uncovering Fee Savings for U.S. Public Funds.”

The report analyzes fees and fee dispersions among index strategy portfolios with portfolio sizes of $1 billion, $500 million, $250 million, $100 million and $50 million, and hypothesizes that many U.S. public pension funds that hired passive managers years ago have not revisited fee terms in the intervening years.

When analyzing S&P 500 index strategies, for example, the report shows the highest possible cost savings is within the $250 million AUM tier, with the highest identified fee coming in at 4 basis points, and the lowest at 0.5 basis points. According to the report, the possible cost savings by renegotiating to the 0.5 basis-point fee would bring potential cost savings to $87,500.

While the $1 billion AUM tier shows the least amount of dispersion at 1 basis point at the top and 0.5 basis points at the bottom, renegotiating to the lower fee level could reap savings of up to $50,000, according to the report.

There is even greater dispersion among Russell 1000 index strategies. At the $1 billion tier, the top fee paid is 3 basis points, while the bottom is 0.5 basis points, representing possible savings of $250,000 in fee costs.

Similar dispersions exist among Russell 1000 Growth, MSCI Emerging Markets, MSCI EAFE and Bloomberg U.S. Aggregate Bond indexes. The greatest dispersion came in the $1 billion AUM tier for MSCI EM index strategies, with 4.5 basis points at the top and 1.3 basis points at the bottom, representing potential cost savings of $320,000.

“Various factors, including consultant selection, manager relationship-building, and difference in research capabilities amongst investors may contribute to this dispersion in passive fees paid,” the report said.

“Though not every passive index mandate is the same, given differences in vehicle choice, securities lending, and custody, we maintain that the evidence suggests there are fee savings to be found regardless. Though not every mandate will yield ($300,000) in potential fee savings, we found that extra money can be found in even the most commonplace, bread-and-butter portfolio building blocks like passive US Large Cap Equity and Core Fixed Income.”

The report is available on Nasdaq eVestment’s website.