Public pension fund management fees
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Public pension fund management fees are paid by public pension systems to outside investment managers. These managers in turn actively select and coordinate the pension fund's investments. This investment method is known as active management, and is used by the vast majority of state pension systems.[1][2]
This is contrasted with passive management, also known as indexing. Under a passive investment management strategy, funds are invested in such a way as to mirror a market index, such as the Standard and Poor's 500 Index. Investopedia explains passive management as follows:[3]
| “ | The money going into an index fund is automatically invested proportionately into individual stocks or bonds according to the percentage their market capitalizations represent in the index. For example, if IBM represents 1.7% of the S&P 500 Index, for every $100 invested in the Vanguard 500 Fund, $1.70 goes into IBM stock.[3][4] | ” |
| —Investopedia | ||
There is considerable debate about which of these methods produces better results for the investor. Some argue that "by picking the right investments, taking advantage of market trends and attempting to manage risk," active investment managers "can generate returns that outperform a benchmark index." Others contend that a passive management method is "the best way to capture overall market returns [because] all investors have access to all the necessary information about a company and its securities, [making] it difficult if not impossible to gain an advantage over any other investor."[2]
Pension management fees by state
2011 and 2012
In July 2013, the Maryland Public Policy Institute (MPPI), a free market and limited government think tank, and the Maryland Tax Education Foundation released a report detailing the fees paid for the management of state pension systems. The report's authors argue that the result of active investment management "is costly to both taxpayers and public sector employees [because] a typical Wall Street manager underperforms relative to passive indexing."[1][5]
According to MPPI, the 10 state pension funds that paid the most in management fees relative to net assets experienced lower returns over a five-year period than the 10 state pension funds that paid the least in management fees. For example, in fiscal year 2012, South Carolina's pension system paid approximately $296.1 million in total management fees (1.31 percent of total net assets at the beginning of the fiscal year) and its five-year rate of return was 1.46 percent. By contrast, Alabama's pension system paid roughly $13.3 million in management fees (0.05 percent of total net assets) and its five-year rate of return was 7.53 percent.[1]
The table below presents the information collected by MPPI. For each state's pension system, total net assets are listed (both for the beginning and end of the fiscal year in question), as well as the total amount paid in management fees. In addition, the rates of return for the pension systems are presented.
| Public pension fund management fees, 2011-2012 | ||||||
|---|---|---|---|---|---|---|
| State | Fiscal year | Beginning of the year total net assets | End of the year total net assets | Total management fees | Management fees as percentage of total net assets at the beginning of the year | Five-year rate of return for the pension fund |
| Alabama | 2012 | $25,092,788,000 | $28,374,703,000 | $13,294,000 | 0.05% | 7.53% |
| Alaska | 2012 | $16,489,643,000 | $16,419,886,000 | $62,184,233 | 0.38% | 0.86% |
| Arizona | 2012 | $28,314,807,000 | $27,862,236,000 | $137,905,000 | 0.49% | 1.80% |
| Arkansas | 2012; 2011 | $15,912,286,857 | $17,797,373,547 | $65,729,237 | 0.41% | 1.22% |
| California | 2012 | $397,107,606,000 | $388,300,002,000 | $960,532,000 | 0.24% | -0.10% |
| Colorado | 2011 | $41,790,120,252 | $40,632,740,352 | $159,485,643 | 0.38% | 2.10% |
| Connecticut | 2012 | $25,086,280,000 | $23,873,812,000 | $87,099,000 | 0.35% | 1.27% |
| Delaware | 2012 | $7,648,780,000 | $7,536,367,000 | $47,318,000 | 0.62% | 3.90% |
| Florida | 2012 | $126,579,719,608 | $119,981,464,834 | $374,200,433 | 0.30% | 1.56% |
| Georgia | 2012 | $69,563,890,000 | $68,239,850,000 | $53,014,039 | 0.08% | 2.95% |
| Hawaii1 | N/A | |||||
| Idaho | 2012 | $12,102,424,421 | $12,071,413,630 | $42,461,439 | 0.35% | 2.10% |
| Illinois | 2012 | $57,424,347,944 | $57,821,599,899 | $313,400,624 | 0.55% | 0.70% |
| Indiana | 2012 | $25,755,673,000 | $25,564,126,000 | $106,484,000 | 0.41% | 0.20% |
| Iowa | 2012 | $23,082,133,000 | $23,243,541,000 | $50,174,760 | 0.22% | 3.18% |
| Kansas | 2012 | $13,468,852,806 | $13,105,811,851 | $42,225,662 | 0.31% | 1.80% |
| Kentucky | 2012 | $30,179,958,000 | $29,076,119,000 | $75,473,000 | 0.25% | 0.20% |
| Louisiana | 2012 | $24,280,707,222 | $23,704,758,063 | $127,141,733 | 0.52% | 1.10% |
| Maine | 2012 | $11,051,692,821 | $10,766,866,860 | $24,300,000 | 0.22% | 1.50% |
| Maryland | 2012 | $37,592,752,000 | $37,178,726,000 | $241,489,000 | 0.64% | 0.78% |
| Massachusetts | 2012 | $50,245,766,000 | $48,867,807,000 | $252,070,837 | 0.50% | 0.11% |
| Michigan | 2012 | $46,106,071,669 | $50,540,016,325 | $190,537,882 | 0.41% | 1.50% |
| Minnesota | 2012 | $53,069,265,000 | $52,887,392,000 | $64,886,000 | 0.12% | 2.30% |
| Mississippi | 2012 | $20,840,987,000 | $20,220,476,000 | $47,575,948 | 0.23% | 1.30% |
| Missouri | 2012 | $43,421,121,472 | $43,142,177,174 | $407,748,659 | 0.94% | 1.60% |
| Montana | 2012 | $8,305,942,274 | $8,304,899,027 | $43,312,842 | 0.52% | 1.22% |
| Nebraska | 2011 | $8,203,974,912 | $9,617,727,238 | $2,221,958 | 0.03% | NA |
| Nevada1 | N/A | |||||
| New Hampshire | 2012 | $5,891,179,000 | $5,774,343,000 | $22,908,000 | 0.39% | 1.80% |
| New Jersey | 2012 | $81,067,610,282 | $77,883,990,040 | $224,200,000 | 0.28% | 2.46% |
| New Mexico | 2012 | $21,583,017,640 | $21,088,985,158 | $49,646,402 | 0.23% | -0.28% |
| New York | 2012 | $315,448,861,000 | $316,880,795,000 | $874,147,529 | 0.28% | 2.91% |
| North Carolina | 2012 | $74,900,000,000 | $74,500,000,000 | $317,796,275 | 0.42% | 2.64% |
| North Dakota | 2012 | $3,743,377,317 | $3,654,079,659 | $19,081,399 | 0.51% | 0.32% |
| Ohio | 2012; 2011 | $165,091,688,276 | $159,507,551,615 | $528,693,965 | 0.32% | 1.56% |
| Oklahoma | 2012; 2011 | $17,208,667,211 | $18,979,092,225 | $45,745,016 | 0.27% | 2.75% |
| Oregon | 2012 | $55,794,848,695 | $53,659,423,570 | $335,163,728 | 0.60% | 1.80% |
| Pennsylvania | 2012; 2011 | $77,319,283,000 | $73,140,758,000 | $682,878,000 | 0.88% | 1.00% |
| Rhode Island1 | N/A | |||||
| South Carolina | 2012 | $22,691,660,000 | $25,891,849,000 | $296,135,000 | 1.31% | 1.46% |
| South Dakota | 2012 | $7,936,269,496 | $7,842,524,241 | $35,142,279 | 0.44% | 2.10% |
| Tennessee | 2012 | $33,663,308,000 | $34,912,773,000 | $32,379,360 | 0.10% | 3.11% |
| Texas | 2012 | $108,539,650,082 | $112,475,732,435 | $530,092,885 | 0.49% | 2.98% |
| Utah | 2011 | $23,012,754,000 | $23,218,742,000 | $50,105,000 | 0.22% | 1.91% |
| Vermont | 2012 | $3,470,318,417 | $3,450,571,044 | $14,304,023 | 0.41% | 2.30% |
| Virginia | 2012 | $54,562,257,000 | $53,309,180,000 | $307,706,000 | 0.56% | 0.80% |
| Washington | 2012 | $68,311,800,000 | $67,887,700,000 | $297,354,000 | 0.44% | 1.20% |
| West Virginia1 | N/A | |||||
| Wisconsin | 2012 | $82,485,576,190 | $80,271,452,828 | $253,704,610 | 0.31% | 2.10% |
| Wyoming | 2011 | $6,665,574,760 | $6,492,787,154 | $30,207,289 | 0.45% | NA |
| U.S. AVERAGE | $53,219,680,231 | $52,738,135,256 | $194,340,363 | 0.40044% | 1.76% | |
| U.S. MEDIAN | $27,035,240,000 | $28,118,469,500 | $81,286,000 | 0.38524% | 1.58% | |
| 1"Three states— Hawaii, Nevada and Rhode Island—were excluded because they hadn’t published CAFRs for fiscal years ending December 31, 2011 or later. West Virginia was excluded because its June 30, 2012 CAFR lacked sufficient disclosure."[1] Source: Maryland Public Policy Institute, "Wall Street Fees, Investment Returns, Maryland and 49 Other State Pension Funds," July 1, 2013 | ||||||
See also
External links
Additional reading
- Maryland Public Policy Institute, "Wall Street Fees, Investment Returns, Maryland and 49 Other State Pension Funds," July 2, 2013
- Investopedia, "Passive vs. Active Management," accessed October 9, 2014
- Forbes, "Finally, An Answer to the Active Versus Passive Strategy Debate," January 1, 2013
Footnotes
- ↑ 1.0 1.1 1.2 1.3 Maryland Public Policy Institute, "Wall Street Fees, Investment Returns, Maryland and 49 Other State Pension Funds," July 1, 2013
- ↑ 2.0 2.1 American Institute of Certified Public Accountants, "Active vs. Passive Portfolio Management," January 1, 2014
- ↑ 3.0 3.1 Investopedia, "Passive vs. Active Management," accessed October 9, 2014
- ↑ Note: This text is quoted verbatim from the original source. Any inconsistencies are attributable to the original source.
- ↑ Maryland Public Policy Institute, "About MPPI," October 7, 2005
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