Funston Advisory Services Issues Final Report on STRS Ohio’s 2022 Fiduciary Performance Audit, Recognizes System’s Operational Excellence

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Funston Advisory Services released its final report on its fiduciary performance audit of STRS Ohio on May 19. The audit began in 2021 and was conducted on behalf of the Ohio Retirement Study Council. The final report found no indicators of fraud or misdoing and reflected positive comments on STRS Ohio’s operations and investments.

STRS Ohio Executive Director Bill Neville said, “STRS Ohio extends its appreciation to the Ohio Retirement Study Council for its oversight and for administering the fiduciary audit of the system. We are pleased, but not surprised that the report cites numerous examples of STRS Ohio operating with leading practices. This extensive report includes recommendations for STRS Ohio to consider but overall reflects a system that is well-managed. STRS Ohio looks forward to completing a comprehensive review of the full report and, working with board and staff, taking prudent steps to improve our operations and governance. We also want to thank Funston Advisory Services for its independent, thorough analysis, detailed recommendations and for recognizing STRS Ohio’s adherence to its fiduciary duties.”

The report noted:

  • Overall, STRS is operationally excellent with effective operational policies and processes. The STRS system is a generally well-run, high performing operation. NASRA reports STRS outperformed its U.S. peers aggregate in terms of changes in actuarial funding level FY2001 to FY2020. Certainly, operational improvements can always be made and STRS is no exception. These are detailed throughout our report.

  • Staff compensation is consistent with prevailing peer practices.

  • Investment performance is in the top quartile (25%) and costs are consistent with peers.

  • Member services are top decile (10%), and costs are below peers.

  • Investment operations demonstrate excellence. The effective use of lower cost in-house management by STRS is at an advanced level, as demonstrated by the CEM report.

The report indicated STRS Ohio is consistent with leading industry practices in all areas of investment performance measurement and monitoring and cited the system’s investment transaction cost and broker practices as “leading practices compared to peers.” Regarding investments, Funston went on to say the “benchmark development process for the asset portfolio, the calculation of performance results and the presentation of performance results to the STRS Board are leading practice.”

Funston also addressed concerns system stakeholders have expressed about the pension fund. “We recognize certain stakeholders will not be satisfied until annual COLA increases are restored. We also recognize the hardship retirees are experiencing, but the fiduciary duty of the Board is to ensure the sustainability of the fund for current and future members and beneficiaries. The Board is legally obligated to consider and balance the needs of both participant constituencies.”

The report addressed several stakeholder criticisms specifically, including:

Claim Funston’s Conclusion
STRS Ohio staff aren’t sharing the pain “It is the fiduciary duty of the STRS Board to make decisions in the best interests of current annuitants and younger participants who rely on the fund for future benefits. Difficult decisions were made. The attraction and retention of talented staff is essential to the success of STRS’ internal investment management strategy. Compensation is consistent with peers.”
Investments have seriously underperformed “STRS investment performance is in the top 25% compared to peers. STRS is the top performing Ohio fund over the past 10 years.”
Investment expenses — especially private equity — are exorbitant “All costs are closely monitored and controlled. Investment costs — including private equity costs — are lower than peers per the CEM report delivered on 12/16/21. STRS saves $100 million a year by managing investments in-house ($1 billion over 10 years). The Private Equity Co-Investment program promises to save meaningfully on private equity expenses going forward. We note that PE has earned 19.8% over the 10-year period ending 12/31/21, additive to Total Plan results that were 11.2% during the same period, increasing total plan results.”
Lack of transparency especially re: private equity fees “PE fee transparency is an industry-wide challenge. We make recommendations for improving fee disclosures and transparency, especially private equity (PE) fees, and by continuing to stream meetings, make meeting materials available and then archiving them online to improve accessibility. STRS is participating in the development of leading standards as one of a 10-person working group by the DFA Institute commenting on proposed SEC regulator standards for Private Equity advisors.”
Potential fraud/Defalcation This is not a forensic audit but no evidence of fraud or defalcation came to our attention during this review.

The full 279-page report (including executive summary) includes recommendations for improvements in several areas, including governance policies and practices, the board’s use of committees and stakeholder engagement. The report is now posted on the Ohio Retirement Study Council website at