Pension, Trust Costs on the Way Up

February 18, 2009 ( - The total cost of doing business for pension funds and trusts has increased by 14% over the last four years, from an average of 41.5 basis points of fund assets in 2004 to 47 basis points in 2008, according to a new study.

The rise is largely attributable to increased investment management fees and larger allocations to higher fee investments, according to a research report from Callan Investments Institute.

The report said major long-term trends identified since 1998 include both increasing external investment management fees (from 83% to 88% of total fund expenses) and non-investment management external adviser fees (from 4% to 6% of total fund expenses). Callan said custody costs have declined as a percentage of total fund expenses (from 5% to 3%).

Other cost trends identified by Callan include:

  • Total investment-related expenses have increased steadily, from 35.6 basis points of total fund assets in 1998 to 47.3 basis points in 2008.
  • In 2008, 75% of survey respondents allocated a portion of assets to real estate, up from 59% in 2004. The percentage of firms with allocations to private equity was static from 2004 to 2008 at just over 40%. Of those firms with allocations to real estate and private equity, average allocations increased from 2004 by 3% and 1%, respectively, while average allocations to domestic equity and domestic fixed income shrank.
  • Smaller funds incur expense premiums relative to mid-sized and larger funds of 15% and 50%, respectively.
  • Corporate funds pay an average 18% more to operate their funds relative to their public fund counterparts. However, when comparing similar sized corporate and public funds, the difference in total investment-related expenses is 1 basis point, on average.
  • The use of passive management has decreased over the past four years, particularly for public funds. This decline goes hand in hand with increased allocations to non-U.S. equity and alternatives at the expense of domestic equity and fixed income.
  • The use of internal management has also fallen: 25% of respondents manage some portion of assets in-house, down from 31% and 28% in 2004 and 2001, respectively.
  • The custody cost differential between smaller funds and larger funds is relatively significant, indicating that fund size matters a great deal here.

More information about obtaining a copy of the Callan research report is available at .