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Investment earnings make up around 60 percent of pension benefits. Over the past three decades, state and local pension plans have changed their investment strategies in attempt to boost investment returns. Plans originally invested in fixed-income bonds, but beginning in the 1980s and 1990s, began increasing their investments in stock and equities. In the past decade, plans have increased alternative investments such as private equity, hedge funds, real estate, and commodities.   

Investments in equities and alternatives can result in greater financial returns but also carry more risk and volatility. Public pension plans experienced strong investment returns in the 1990s during high economic times but experienced significant market losses during the economic downturn. Additionally, the shift to alternative investments has overlapped with an increase in fees. From 2006 to 2012, state plans reported around a 30 percent increase in investment fee rates, with fees approximating over $2 billion.    

Based on these findings and the existing $1 trillion pension funding gap, the authors recommend that government and board stakeholders take greater vigilance in ensuring the long-term sustainability of pension plans. The authors based their research findings on the U.S. Federal Reserve Financial Accounts, the “Public 100” collected by Pensions & Investments, state comprehensive annual financial reports, and pension plan actuarial valuations.