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The Determinants and Opportunity Costs of External Management Fees for State‐Administered Pension Plans
Author(s) -
Diebold Jeffrey,
Coggburn Jerrell D.
Publication year - 2018
Publication title -
public budgeting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.694
H-Index - 30
eISSN - 1540-5850
pISSN - 0275-1100
DOI - 10.1111/pbaf.12207
Subject(s) - pension , business , finance , pension plan , investment (military) , economies of scale , state (computer science) , management fee , private pension , economics , monetary economics , actuarial science , institutional investor , open end fund , corporate governance , marketing , algorithm , politics , political science , computer science , law
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.