there may be a small consolation prize for pension plan sponsors who have seen their defined-benefit assets shrink rapidly in recent months: Now could be the time to revisit the fees paid to investment managers for running a portion of corporate pension assets.
Mr. Phillips pointed out that many institutional investors have become stingier, and they are willing to pay top dollar only for outperformance and true managerial skill. While it's unlikely that alternative investment managerssuch as hedge fund or hedge fund-of-funds managerswould be willing to budge on their fees, traditional long-only equity managers, where investment products have grown more commoditized, might feel more pressure to bend.
Through the first six weeks of the year, the S&P 500 stock index had dropped by roughly 9%, and the average funded status of large corporate pension plans has declined as a result. The defined-benefit plans of companies in the S&P 1500 saw their assets decline by a combined $110 billion in January, according to actuaries at Mercer, prompting their funded status to drop by 7% to 8%. On average, these defined-benefit plans became underfunded last month, dropping to a roughly 95% funded status.
With active equity managers, defined-benefit funds typically pay a flat fee based on the amount of assets in a portfolio. And the larger the portfolio, the lower the fee: an actively managed domestic large-cap growth portfolio with $500 million, for example, will cost institutional investors an average fee of 42 basis points, according to data from Casey Quirk & Associates. Meanwhile, the average fee on a $25 million large-cap growth portfolio is 65 basis points.
If an active manager is currently achieving only mediocre returns, yet institutional investors believe in the manager's long-term potential, pension plans may be able to negotiate to trim a few basis points off these flat fees, noted Mr. Phillips.
Another alternative could be to ask the managers to adopt a performance-based fee, suggested David Lee, a principal at Dahab Associates, an institutional investment consulting firm. In such an arrangement, the manager would lower the base fee it charges a pension plan and collect an additional fee based on its ability to outperform a predetermined benchmark.
The prospect of lower fees has certainly been weighing on the minds of asset management executives, Mr. Miyao said, citing a recent Kasina survey of senior officials at large asset management firms.