Price isn’t everything

Transaction costs are important -- not all-important.

Plan sponsors pay attention to their trading costs -- but they’re not losing any sleep over them.

Although 75.7 percent of respondents to this month’s Pensionforum regularly monitor transaction costs for equity trading, just 14.6 percent follow such costs very closely. And 59.8 percent say they haven’t stepped up their tracking efforts in recent years. In general, plan sponsors don’t appear to check their transaction costs very often: 63 percent of respondents say they review their costs quarterly or semiannually.

Plan sponsors’ phlegmatic approach might be credited to the fact that they feel the transaction costs they are paying are just about right; 92.4 percent consider their current overall transaction costs satisfactory.

That said, 55.2 percent of respondents say that they are trying to lower their transaction costs. More than 48 percent say that monitoring in itself helps drive those costs down, but 33.3 percent say they are asking their managers to use discount brokerages to handle some of their transactions. Nearly 60 percent say that their efforts to reduce costs are paying off, and 37.5 percent say it is too soon to tell (see Trading).

For those plans that don’t review transaction costs, the reasons are myriad: 41.2 percent say poor manager performance, which includes excessive transaction costs, should lead to firing. Another 41.2 percent say the expenses that plans roll up by monitoring transaction fees swallow any savings they might generate. And 17.6 percent say they don’t believe the costs are significant to the bottom line.

Best execution does appear to be an issue that plans take very seriously: A combined 91 percent say it is a very or somewhat high priority. Only 9 percent say it is not a priority at all.

Does your pension fund regularly monitor its transaction costs for equity trading?

Yes 75.7%

No 24.3

If yes, have you stepped up your tracking efforts in recent years?

Yes 40.2%

No 59.8

How closely do you monitor your transaction costs?

Very closely 14.6%

Somewhat closely 63.1

Not very closely 22.3

Do you monitor these costs for:

In-house managers only? 2.1%

External managers only? 77.3

Both in-house and external managers? 20.6

Who monitors your transaction costs for you?

Outside consulting firms 34.0%

In-house staff 18.0

Master trustee 13.0

Some combination of the above 32.0

Other 3.0

How frequently do you review your transaction costs?

Daily 1.0%

Weekly 1.0

Monthly 19.0

Quarterly 41.0

Semiannually 22.0

Other 16.0

What components of transaction costs do you monitor?

Commissions 96.9%

Market impact 52.6

Portfolio turnover 40.2

Soft dollar usage 43.3

Futures trading costs 7.2

Why do you monitor these costs?

As another way of evaluating our manager’s performance 44.0%

As part of a total-quality-management program 38.0

To save money 33.0

To improve performance 27.0

In response to Department of Labor guidelines 17.0

Other 8.0

If you don’t monitor these costs, why not?

Poor manager performance, including excessive transaction costs, should simply lead to firing 41.2%

Don’t believe these costs are significant to the bottom line 17.6

Haven’t gotten around to it yet 5.9

The trouble and expense of monitoring is not worth any savings we could generate 41.2

There is no accurate way to measure these costs 11.8

Other 17.6

How would you characterize your current overall transaction costs?

Higher than we would like 7.6%

Satisfactory 92.4

Are you trying to lower your transaction costs?

Yes 55.2%

No 44.8

If so, how?

Monitoring in itself helps to lower costs 48.3%

Working with managers to lower costs 26.7

Putting more assets into passive or semipassive strategies 23.3

Asking managers to direct some business to discount brokers 33.3

Asking managers to use electronic networks 16.7

Limiting the size of full-service commissions that managers can pay 6.7

Other 18.3

Are your efforts to lower transaction costs paying off?

Yes 57.8%

No 4.7

Too soon to tell 37.5

How much of a priority is achieving best execution?

It is a very high priority 53.0%

It is a somewhat high priority 38.0

It is not a priority 9.0

The results of Pensionforum are based on quarterly surveys of a universe of 800 corporate and 250 public pension plan sponsors. Because of rounding, responses may not total 100 percent.

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