For Pension Funds, Higher Fees Don’t Mean Higher Returns, Study Finds

July 2, 2013, 11:01 a.m. ET

For Pension Funds, Higher Fees Don’t Mean Higher Returns, Study Finds

Report on State Pension Funds Adds Fuel to Debate on Active Investment Managers

MICHAEL CORKERY

Public-employee pension plans paying the highest investment fees aren’t generating the highest returns, according to a new study by a pair of Maryland think tanks. In fact, just the opposite may be true, says the Maryland Public Policy Institute and Maryland Tax Education Foundation. On average, 10 states paying the most money-management fees had lower investment returns between June 30, 2007 and June 30, 2012 than 10 states paying the fewest fees.

In recent years, many pensions have been willing to live with the high fees charged by alternative investment managers, such as hedge funds, in hopes that these firms can deliver high returns with less risk than stocks.

The report could add fuel to the growing debate over whether pensions should be moving away from higher-cost, active-investment managers and toward lower-cost, passive investments such as indexes.

The report calculates investment fees as percentage of a pension fund’s total assets.

“Many states are spending millions of dollars a year in Wall Street fees and they seem to be getting very little in return,” says Jeff Hooke, a co-author of the study and chairman of Maryland Tax Education Foundation, a conservative-leaning group.

The 10 state pension funds paying the most fees had a median five-year annualized return of 1.34%. The 10 state funds paying the least in fees reported a 2.38% return for the five year period.

The study ranks fees and investment returns at the largest pension funds in 35 states with fiscal years ending June 30, 2012.

The study examined fees for statewide pension funds covering a range of workers. In some states, the study looked at the largest pension plan, such as teachers’ funds. South Carolina Retirement System paid the most fees in the study, totaling 1.3% of total pension assets. The Teacher Retirement System of Georgia paid the least in fees, totaling 0.09% of total assets, according to the study.

South Carolina’s five-year return rate was about 1.5% while Georgia’s returns were about 2.9%, the report says.

In a statement, South Carolina chief investment officer Hershel Harper said “there is no one common practice in reporting investment fees paid.”

“We understand practices vary widely, making any ‘apples to apples’ comparison of standard financial statement investment management fees nearly impossible,” Mr. Harper said. South Carolina has a relatively large allocation to alternative investments.

A spokesman for the Georgia teachers’ pension couldn’t be reached.

The study grew out of the Maryland think tanks’ scrutiny of the pension plan of their home state, says Mr. Hooke, a managing director at Focus, an investment banking firm in Washington, D.C.

Mr. Hooke says in a similar study last year, his group missed some fees paid by certain states, but those oversights have been corrected this year.

Some pension plans have been demanding lower fees from hedge funds and private-equity firms. One plan in Montgomery County, Pa. has moved nearly all of its money into index funds to lower costs.