Cost Efficiency and Investment Governance for Public Pension Plans

By: Christopher Tessman and Ian Leverich, Wilshire

Public pension plans can improve net returns and fiduciary outcomes by adopting a rigorous Total Cost of Ownership (TCO) framework that uncovers hidden fees, optimizes costs across the full investment value chain, and strengthens governance through data-driven oversight and ongoing compliance.

Public pension funds face increasing pressure to reduce costs and improve returns. A disciplined approach to uncovering hidden costs in portfolios can be critical to understanding the Total Cost of Ownership (TCO), improving governance, and fulfilling fiduciary responsibilities.

A comprehensive TCO framework goes beyond headline management fee analysis. TCO addresses cost drivers across the investment value chain, from management fees to trade execution, settlement, and custody costs. Plan sponsors can achieve this with a bottom-up analysis of all cost elements and operational processes that prioritize risk management, transparency, and contract compliance.

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A robust governance model should cover the full spectrum of asset classes and investments, including public markets, private markets, foreign exchange, and services providers. Optimizing costs and efficiencies is not a simple task for any investment staff or traditional consultant. It involves:

1. Gathering data on all cost components and benchmarking
2. Forensic analysis of hidden fees and transaction costs
3. Renegotiating non-competitive terms and eliminating discrepancies
4. Implementing ongoing monitoring to ensure sustained compliance and continuous improvement

Traditional management fee metrics often overlook significant hidden costs. A TCO approach includes a thorough review of all direct and indirect cost elements, such as:

• All manager-related fee elements, including verification of performance fees and carried interest
• Explicit and implicit transaction and trading costs
• Foreign exchange and hedging costs
• Administrative and custody fees in segregated accounts and pooled vehicles
• Reporting costs and capabilities
• Clearing, collateral, and operational expenses including foreign tax reclamation
• Cash management and sweep fees

Compliance with fund legal documents (e.g., LPA, PPM) and bottom-up recalculation of fee structures is important to avoid overcharges. Common findings in optimization projects include non-market-compliant costs and processes, fee calculation discrepancies, inadequate cost allocations, and unfavorable contract terms. Examples that we have found include excessive transaction costs, uncompetitive management fees, omitted fee offsets, MFN clause violations, double-charging, and tax leakage due to inefficient structures.

Ultimately, adopting a rigorous TCO framework empowers public pension funds to uncover hidden inefficiencies, enhance governance, and drive meaningful, sustained improvements in net returns for beneficiaries.

About the authors: Christopher Tessman is a Senior Vice President at Wilshire, specializing in client service for public pension plans and overseeing Wilshire Compass. Since joining Wilshire in 2000, Mr. Tessman has played a key role in advising a diverse array of asset owners, including public and corporate pension plans, foundations, endowments, insurance companies, family offices, and other wealth managers.

Ian Leverich, Managing Director, is responsible for XTP’s business development and client service in North America, assisting allocators with oversight of the costs and fees incurred on their funds’ behalf. He has worked with many of the largest public funds, corporate pensions, foundations, and endowments in the world – developing strategies to mitigate risk and lower investment implementation costs.

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