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Recent research from North Carolina State University finds that state pension plans would be better off avoiding external asset managers when investing their plans' assets—and would carry substantially smaller unfunded liabilities if they simply invested in a conventional index fund.
"We set out to answer three questions about state pension plans, their external management fees and the return on their investments," says Jeff Diebold, an assistant professor of public administration at NC State and co-author of a paper on the work. "First, what influences the amount of money that state pension plans pay in external management fees? Second, do higher fees lead to better performance? And third, how would those pension plans have fared if they had taken the money spent on external management fees and invested it in a conventional portfolio, with 60 percent invested in the S&P 500 and 40 percent invested in an intermediate bond fund?"
Questions - Researchers - Public - Plans - Database
To address these questions, the researchers turned to the Public Plans Database, where they were able to find data from 49 state-administered pension plans—spanning 30 states—regarding how much those plans spend each year on external management fees. Specifically, the researchers evaluated data on the performance of those 49 plans, spanning the years 2001-2014.
Their first finding was that if states had to begin paying more money into their pension plans, they became more likely to pay higher external management fees—though this was moderated by plan size. The effect was still seen in large pension plans, but it was less pronounced than was seen in smaller plans.
Sense - Way - Pension - Plans - Returns
"This makes sense, in a way, because the pension plans are trying to achieve returns that outstrip the stock market as a whole," says Jerrell Coggburn, a professor of public administration at NC State and co-author of the paper. "And larger plans may be able to negotiate better fees...
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