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The board overseeing 401(k)-style benefits for 52,000 Illinois state workers has terminated all money managers who try to handpick winners, a major embrace of low-cost funds that instead mimic the markets.

The Illinois State Board of Investment, in a 7-to-1 vote on Thursday, jettisoned mutual funds sold by T. Rowe Price Group Inc., Fidelity Investments, Invesco Inc. and four others.

The pullback means roughly $2.8 billion of Illinois state-employee retirement assets—representing roughly two-thirds of the $4 billion fund—would now be in the hands of Vanguard Group and Northern Trust.

The shift would dramatically reduce outside management fees paid plan-wide, dropping from more than $10 million annually to $1 million, Marc Levine, the board's chairman, said in an interview. On a per-participant basis, it equates to fees being shaved to about one-fourth of the previously paid total.

The decision came down to plan participants being provided too many choices and a struggle to justify the extra fees due to mixed performance, Mr. Levine said. "Excellence and complexity is not the same thing," he said. "More choices are worse than fewer choices."

The 52,000 workers primarily have a traditional defined-benefit pension, but they can supplement that with an employer-provided, tax deductible 401(k)-style plan. Those who opt for 401(k)-style savings make additional tax-deductible contributions from their paychecks.

The Illinois plan's abandonment of higher-charging, so-called "active" managers comes amid a broader debate unfolding among big investors: whether Wall Street firms can consistently outperform a simple index fund that costs virtually nothing.

The shift means Illinois state workers, legislators and judges—those participating in the 401(k)-style fund—would choose from between seven categories of investments rather than 16. All the holdovers will be so-called "passive" funds that strive to imitate, not outsmart, the markets.

"We're taking all that complexity out," Mr. Levine said.

The Illinois State Board of Investment oversees a traditional pension benefit for about 120,000 current and retired workers, including the 52,000 who opt for the supplemental 401k-style benefit. The strategy for the broader $16 billion plan is also to try to drive down external-management fees and simplify, according to Mr. Levine.

In March, Mr. Levine asked one hedge-fund executive point-blank: "Why do I need you?" In recent months, the Illinois plan has slashed 65 of its 80 hedge-fund managers.

Other U.S. retirement systems also offer workers optional supplemental 401(k) plans to pair with a traditional defined benefit pension. U.S. pension plans collectively have $470.9 billion in 401(k)-style assets, according to the Federal Reserve.

The nation's largest U.S. public pension, the California Public Employees' Retirement System, manages such a $1.9 billion so-called defined-contribution plan in addition to the $283.9 billion traditional pension, according to a September report by the Pensions & Investments trade publication and consultant Willis Towers Watson.

The fifth-largest U.S. pension, the Florida State Board of Administration, has $8.6 billion placed in a 401k-style plan versus $139.2 billion for a traditional pension.

Write to Timothy W. Martin at timothy.martin@wsj.com

(END) Dow Jones Newswires

September 16, 2016 15:15 ET (19:15 GMT)

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