RETIREMENT PLANS’ COMPREHENSIVE FEE ANAL YSIS
Office of Retirement Services
Investment Program
November 5th, 2024
1 Investment Policy Statement on Investment Fees
2 “The Plan will seek alignment of interests when negotiating fees while pursuing the best net of fees performance results. Investment costs shall be monitored, controlled, and whenever possible negotiated to ensure cost effectiveness. The Board shall give consideration to the impact of administrative expenses, external management fees and performance fees when establishing the asset mix policy of the Plan. The Board will be provided reports on investment costs of the Plan at least annually.”
Understanding Investment Fee Analysis
3 • Complex topic
• Declining return expectations → Increased focus
• Net returns = Gross returns – Management fees – Incentive fees – Operating Expenses • A function of asset allocation and asset class structuring • Higher complexity = higher fees
• ORS comprehensive annual fee reporting started in 2015 • Includes embedded or unobserved fees/expenses (e.g., fees not reported on statements) • Few public plans have comprehensive fee reporting (CalSTRS, OCERS) • No public-sector standard methodology for comprehensive fee reporting • Complies with California Government Code §7514.7
Understanding Total Expense Ratio
4 Net returns = Gross returns – Management fees – Incentive fees – Operating Expenses Fee type Description Examples
Management fees Fees paid to investment management firms Incentive fees Performance-based fees paid to investment management firms
Operating expenses Costs of administering individual investment vehicles
Audit, tax, legal, custodian
Other expenses Costs incurred at the plan level Staff salaries and benefits, consultants, third party
vendors
Calendar Year 2023 Fees
5 Source: ORS 2023 Fee Report
Values show are in $ millions
Source: ORS 2023 Fee Report
Values show are in $ millions
Investment Staff Salary and Benefits
($ mm)
Consultants
($ mm)
Custodian
($ mm)
Other V endors and
Travel
($ mm)
Total Other Costs
($ mm)
Other Costs Fee
Ratio
2.6 1.1 1.0 1.3 6.0 0.07%
Management
Fees
($ mm)
Incentive Fees
($ mm)
Operating
Expenses
($ mm)
Mgmt, Incent, and
Op Exp
($ mm)
Average Balance
($ mm)
Expense
Ratio
Federated Pension 16.3 6.7 4.6 27.6 2,833 0.97%
Police & Fire Pension 26.4 10.3 8.7 45.4 4,690 0.97%
Federated Health Care 0.8 - 0.1 0.9 359 0.24%
Police & Fire Health Care 0.4 0.0 0.1 0.5 289 0.17%
All 4 ORS Plans 43.9 17.0 13.4 74.4 8,171 0.91%
Total Expense Ratio (Comprehensive)
6 0.58% 0.52% 0.51% 0.56% 0.56%
0.35% 0.44%
0.94%
0.07%
0.23%
0.16% 0.15%
0.10%
0.17%
0.17%
1.09% 1.11%
1.55%
0.80%
0.97%
2019 2020 2021 2022 2023
Management Fees Incentive Fees Operating Expenses Total San Jose Consolidated
Net Returns: 14.1% (2019) 14.3% (2020) 14.9% (2021) -9.2% (2022) 9.7% (2023) *Total Expense Ratio consolidated between both pension plans Management Fee Ratio Trend
7 Source: ORS, BNY Mellon
*Charts only represent fund management fees, not incentive or fund operating expenses *Management Fee Ratio consolidated between both pension plans
0.82%
0.88%
0.81%
0.72%
0.61%
0.54% 0.53%
0.59% 0.56%
• Sources of fee savings include Staff negotiations, early investor discounts, and volume discounts. • Private Markets estimated fee savings based on commitments that closed in calendar year 2023. • Additional fee savings not modeled include fee structures of fund-of-ones compared to fund-of-funds alternative, upside performance of investments with incentive fee discounts, and fee savings from Private Markets commitments prior to 2023. $18.5 million of estimated fee savings generated in 2023 Asset Class Fee Savings
($ mm)
Growth 17.4
Public Equity 4.3
Total Private Markets 12.8
Emerging Market Bonds 0.2
High Yield Bonds 0.0
Low Beta 0.5
Market Neutral Strategies 0.5
Other 0.8
Core Real Estate 0.8
Investment Grade Bonds 0.0
Total Plan 18.5
8 3.3%
7.2%
5.3%
8.8%
3 Year Return 5 Year Return
Low Cost Passive Portfolio Fund Net Return
+2.0%
per
year
+1.6%
per
year
Value Added From Active Strategies
9 As of December 31, 2023
*Low-Cost Passive Portfolio: Calculation of Board strategic asset allocation targets using public market benchmarks managed on a passive basis.
Estimated Cumulative Value Added in $: $438.8 million $531.6 million Appendix
10 Glossary of Terms
11 • Active strategies: Funds that attempt to outperform an index • Asset allocation: Distribution of assets across a number of asset classes that each exhibit a unique combination of risk and expected return. Asset allocation is the most important determinant of long-term plan performance
• Hedged strategies: Investments that generally seek to achieve a return regardless of market direction • Gross returns: Returns before the deduction of expenses • Incentive fees: Performance-based fees paid to individual investment management firms. Incentive fees are a form of shared economics. Also known as “carried interest” • Management fees: Asset-based fees paid to individual investment management firms • Net returns: Returns after the deduction of management fees, incentive fees, and operating expenses • Operating expenses: Costs of administering individual investment vehicles (not the retirement plans) • Other expenses: Costs incurred at the plan level (staff, consultants, third party vendors, etc.) • Passive strategies: Investments that intend to match the return of an index • Private strategies: Investments in illiquid assets such as privately held companies or real estate • Total expense ratio: Total expenses (sum of management fees, incentive fees, and operating expenses) divided by average plan assets
Contribution to Management Fee Ratio by Fund Type
12 *Active strategies only
*Consolidated between both pension plans
0.21%
0.16% 0.15% 0.16%
0.21% 0.20% 0.18%
0.25%
0.27% 0.28% 0.28%
0.25%
0.32%
0.30%
0.32%
0.26%
0.16%
0.08% 0.07%
0.07%
0.07%
2017 2018 2019 2020 2021 2022 2023
Public Private Hedged
Asset Allocation Targets
13 As of December 31st , 2023
Police & Fire PensionFederated Pension
Source: ORS
Source: Meketa InvestmentGroup
1 Expected return assumptions for 1) Bonds equals the yield of the ten-year Treasury plus 100 basis points, and 2) Equities equals the dividend yield plus the earnings yield of the S&P 500 index (using the inflation -adjusted trailing 10-year earnings).
Probability calculation is for the subsequent ten years.
Asset Allocation Considerations
14 Asset Allocation Considerations
15 1 Expected return and standard deviation are based on Meketa Investment Group’s 2024 Annual Asset Study and reflectour 20-year expectations.Returnsfor periodslonger than one year are annualized. 2 “WorstCase” return projections encompass 99% of all possibleoutcomes.
Source: Meketa InvestmentGroup
Plan Return History
16 Source: Meketa InvestmentGroup