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Pension Funds Lag Individuals' Adoption of Index Funds

Despite conventional wisdom that institutions like pension funds and endowments have moved to passive investing more aggressively than individuals, the opposite appears to be true. 


As reported in a recent New York Times article, just under 20% of public pension fund assets and 11.2% of corporate plan assets are invested in passive strategies, compared with 30% for individuals — a figure that has risen from 13.8% 10 years ago.


A move by Pennsylvania’s Montgomery County employee plan to index funds saved $1.3 million in fees, according to the report, while in his recent budget address Pennsylvania Gov. Tom Wolf (D) signaled that the Keystone State may follow suit for its $53 billion public school fund and the $27 billion state employee plan, which could save the state $476 million and $140 million in fees, respectively.   


The biggest shift to indexing by a public fund, by CalPERS, brought a lot of attention to the issue of whether larger institutions, particularly state and municipal plans, should be using more passive strategies. Critics of traditionally higher priced active managers — especially alternatives like private equity, hedge funds, real estate and commodities — and high-priced consultants argue that state and local officials can be swayed by perks and trips, and that many do not want to “index themselves out of a job.”

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