Pension funds for state and local government workers have increasingly turned toward stocks and alternative investments, such as hedge funds, moving away from bonds as they seek to boost their returns.

But that move carries risk in addition to potential reward, says a new report from The Pew Charitable Trusts and the Laura and John Arnold Foundation.

The pension funds want enhanced returns because as of 2012 there was a $1 trillion gap between what the workers are owned and assets in the pension plans, according to Federal Reserve data.

As for the shift in investment strategy, it's understandable given pension plans' desire to maximize returns and diversify their portfolios, the study says.

Editor's Note: Obama ‘Blunder’ Spawns Massive Profit Opportunity

"But these changes in investment practice have coincided with an increase in fees as well as uncertainty about future realized returns, both of which may have significant implications for public pension funds’ costs and long-term sustainability," it states.

"In short, increased investments in equities and alternatives could result in greater financial returns, but also increased volatility and the possibility of losses on these assets."

Meanwhile, a new study by three officials at Boston College's Center for Retirement Research found that despite the torrid stock-market rally last year, state and local government pension plans remained only 72 percent funded, unchanged from 2012.

And why? "Actuarial-smoothed assets grew modestly, and Calpers, one of the nation's largest plans, significantly revised its reported funded ratio," the report said.

Editor's Note: Obama ‘Blunder’ Spawns Massive Profit Opportunity

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