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

In recent years, public plans have increasingly scrutinized the fees they pay to external asset managers to gauge whether the fees are justified. To isolate the impact of fees on performance, the analysis focused on each plan’s ability to meet its stated asset-class benchmarks. Interestingly, plans are not uniform in their asset-class benchmarks; some use publicly quoted indices, others use indices that capture the performance of narrow asset classes such as private equity, and still others use custom benchmarks. But, regardless of the benchmarks used for each asset class, most plans have outperformed their blended portfolio benchmark over the long term.
Even though most plans outperform their blended benchmark, the data show a correlation between higher fees and worse relative performance. And, looking at expense ratios across the various asset classes, it is clear that alternatives charge much higher fees than traditional asset classes such as public equities and fixed income. Finally, plans that underperformed their blended benchmark from 2011-2016 reported higher expense ratios than plans that outperformed their benchmark, particularly within alternative asset classes.
These initial findings suggest that investment fees – in particular, outsized fees on alternatives – may play a meaningful role in plan underperformance. Future research on the impact of fees would benefit from a longer timeframe that incorporates a full market cycle – which will be increasingly possible as the trend toward improved fee disclosure continues.

Jean-Pierre Aubry and Caroline V. Crawford

Center for Retirement Research

August 2018

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