Active Versus Passive Investment Management Of State Pension Plans: Implications For Personal Finance

Abstract

There are 19 million workers and retirees and $3 trillion of assets in state pension plans. However, questions have arisen about the long-run ability of the plans to pay promised benefits to retirees. Consequently, proposals have been made to reduce promised pension payments or alter other terms of the pension contracts. Yet another heretofore unexplored alternative is to reduce state pension plan management fees by moving from actively managed portfolios to low-fee passively managed accounts. Using state pension plan data for the 2003-2012 decade and returns from three alternative low fee portfolios, it is found that all states could have increased after-fee earnings and improved their long-run ability to pay retirees by moving to the low-fee investment accounts. While clearly relevant for workers and retirees in state pension plans, the findings also have implications for all investors regarding the ongoing debate between active and passive investment management strategies.