How Do Fees Affect Plans’ Ability to Beat Their Benchmarks?

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State and local government pension plans review their investment performance in two main ways: by comparing their overall portfolio returns to their peers or to a simplified portfolio, and by comparing their returns by asset class to selected benchmarks that reflect their investment goals for each asset class. Plans pay fees to external asset managers with the expectation that they will exceed those benchmarks.

This brief examines the types of benchmarks used for different asset classes, how actual plan investment aligns with those benchmarks, and whether there is any relationship between investment fees and actual returns. Key findings include:

  • Among public plans, there is little uniformity in the use of benchmarks for different asset classes;
  • From 2011 to 2016, most plans’ investment performance surpassed their combined roster of benchmarks; and
  • Data show a correlation between higher investment fees and worse relative performance over the same period, especially for nontraditional asset categories.
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