In this paper we examine the impact of active management of state and local defined benefit plans on investment performance. One of the advantages of state and local defined benefit pension plans is that they are able to achieve economies of scale by pooling and professionally investing and managing the funds, which helps to reduce the operating costs for jurisdictions. However, gains realized from economies of scale could be offset by inefficient management of pension investments. This could mean a range of decisions, but undoubtedly two of the most important are the asset allocation of the plan and whether to use active management or passive management. There has been little formal analysis of these choices and their effect on pension investment returns in the academic literature.
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