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Pension Fund Performance and Costs: Small is Beautiful

Rob M.M.J. Bauer, K. J. Martijn Cremers and Rik G. P.Frehen

Using the CEM pension fund data set, we document the cost structure and performance of a large
sample of US pension funds. To date, self-reporting biases and a deficiency of comprehensive
return and cost data have severely hindered pension fund performance studies. The bias-free
CEM dataset resolves these issues and provides detailed information on fund-specific returns,
benchmarks and costs for all types of pension plans and equity mandates. We find that pension
fund cost levels are substantially lower than mutual fund fees. The domestic equity investments
of US pension funds tend to generate abnormal returns (after expenses and trading costs) close to
zero or slightly positive, contrasting the average underperformance of mutual funds. However,
small cap mandates of defined benefit funds have outperformed their benchmarks by about 3% a
year. While larger scale brings costs advantages, liquidity limitations seem to allow only smaller
funds, and especially small cap mandates, to outperform their benchmarks.

JEL Classifications : G23, G11, G14