Other People's Money: Political Embeddedness on Pension Boards, Alternative Assets and Investment Fees

What the paper says

Abstract State‐administered pension plans report paying roughly $20 billion each year in fees to external asset managers, much of it for high‐cost, high‐risk “alternative” assets such as private equity and hedge funds. These outcomes involve trillions in pension investments that affect the retirement security of millions of public sector workers and the budgets of every U.S. state. Yet, a consistent finding in the finance literature is that these managers tend to underperform broad market indices after accounting for fees. Politically appointed members of pension boards may nonetheless rationally favor these strategies, given the short‐term political incentives of those who appoint them. Drawing on the “political embeddedness” framework, this study assesses whether and how the share of politically appointed members on pension boards influences asset allocation and fees. Using panel data for 66 state‐administered plans from 2019–2022, combined with fee data from annual reports, we estimate plan‐level fixed effects models to examine investments in alternative assets and fees paid by pension systems. We find that, among boards with statutory authority over asset allocation, adding one political appointee (≈10 percentage points) is associated with a 1.2 percentage point increase in alternative asset allocations and a 5–7 percent increase in total fees, even after adjusting for asset composition. These results align with the short‐term incentives of political appointees and underscore how board governance shapes investment outcomes. The prevalence of missing fee data—especially for alternative assets—further highlights the need for greater transparency in fee reporting.