State pension systems that pay the most for money management get some of the worst investment returns and could reduce costs by indexing, according to a study.
The study, which was conducted by the Maryland Public Policy Institute and the Maryland Tax Education Foundation, finds that the 10 states paying the highest investment fees had annualized five-year returns of 1.34%, while the 10 states paying the lowest fees reported returns of 2.38%.
The 10 states with the highest fees paid an average of 0.61%, while the 10 with the lowest fees paid an average of 0.22%.
“The study’s findings make money management fees paid by state pension systems difficult to justify,” says Jeffrey C. Hooke, chairman of the Maryland Tax Education Foundation and the study’s co-author.
The study also could not find proof that alternative investments beat the market.
An alternative may be low-cost index investing. By indexing most of their portfolios, the authors conclude that the funds surveyed could save US$6 billion in fees annually, while obtaining similar or better returns compared to active managers.
“There is simply no correlation between high money management fees and high investment returns,” explains John J. Walters, co-author and visiting fellow at the Maryland Public Policy Institute. “Retired state employees and taxpayers across the country are not getting their money’s worth.”
Read more: