How does a plan sponsor persuade a money manager to accept lower fees? Sometimes all you have to do is ask.
Although only 29.6 percent of plan sponsors say they've asked managers to renegotiate fees, a whopping 94.3 percent of those who did succeeded in obtaining at least some reduction in rates. Three quarters of those who renegotiated their fee structures ended up reducing their fees by only 10 percent or less. Still, 12.5 percent of respondents say their fees fell by more than 20 percent.
It also appears that fixed-income managers proved to be especially pliable when it came to reducing fees. When asked which type of managers renegotiated fees, about 45 percent of respondents cited fixed-income managers. In contrast, a little more than 35 percent cited growth or aggressive-growth managers. Among equity managers, small-cap and growth managers were most willing to accept lower fees.
There's a trend among pension funds to pay managers based on performance rather than pay a flat fee based on a percentage of assets under management. All told, 38.1 percent of plan sponsors say some slice of their defined benefit plans uses performance-based fee arrangements with their managers. Among the plan sponsors that employ this arrangement, 38.6 percent have had performance-based fee schedules in place for more than five years, and a further 34.1 percent set up such a plan in the last two years.
Do performance-based arrangements make for lower or higher fees? The jury is out. More than 43 percent of respondents say fees were somewhat or significantly lower than they were on a standard percentage-of-assets basis, 13.6 percent say they were about the same, and 25 percent say they were somewhat or significantly higher. An additional 18.2 percent can't say whether there has been a difference.
In the past year, have you attempted to renegotiate fees with any of your managers (not including changing to or from a performance-fee arrangement)?
Yes 29.6%
No 70.4
If so, have you succeeded in obtaining lower fees in at least some cases?
Yes 94.3%
No 5.7
If you have succeeded in obtaining lower fees, how much lower are they?
0 to 3 percent 28.1%
4 to 7 percent 15.6
8 to 10 percent 31.3
11 to 15 percent 6.3
16 to 20 percent 6.3
More than 20 percent 12.5
With which types of managers have you been able to renegotiate?
Equity, growth 29.0%
Equity, aggressive growth 6.5
Equity, value 22.6
Equity, large-cap 22.6
Equity, midcap 12.9
Equity, small-cap 29.0
Equity, other type 19.4
Fixed income 45.2
Balanced 0.0
Real estate 0.0
Alternative 9.7
Other 0.0
Had you ever attempted to renegotiate fees before?
Yes 52.1%
No 47.9
If so, were you more or less successful before?
More successful 21.7%
Less successful 8.7%
About the same 47.8
Can't say 21.7
Does your defined benefit plan have performance-fee arrangements with any of its managers?
Yes 38.1%
No 61.9
If so, how long have you had a performance-fee arrangement?
Less than one year 6.8%
One to two years 27.3
Three to five years 27.3
More than five years 38.6
Does your defined contribution plan have performance-fee arrangements with any of its managers?
Yes 6.3%
No 93.8
If so, how long have you had a performance-fee arrangement?
Less than one year 16.7%
One to two years 16.7
Three to five years 0.0
More than five years 66.7
With which types of managers do any of your plans have performance-fee arrangements?
Equity, growth 32.4%
Equity, aggressive growth 2.7
Equity, value 27.0
Equity, large-cap 18.9
Equity, midcap 16.2
Equity, small-cap 27.0
Equity, other type 21.6
Fixed income 16.2%
Balanced 10.8
Real estate 18.9
Alternative 8.1
Other 16.2
Since you put these arrangements in place, how do the fees compare with what they would have been on a standard percentage-of-assets basis?
Significantly lower 18.2%
Somewhat lower 25.0
About the same 13.6
Somewhat higher 20.5
Significantly higher 4.5
Can't say 18.2
Has the performance of the managers involved in these arrangements improved?
Yes, for most managers 9.5%
Yes, for some managers 21.4
No, not in general 31.0
Can't say 38.1
If so, do you attribute that improvement at least in part to performance-based fees?
Yes 26.1%
No 73.9
Are you satisfied with your performance-fee arrangement?
Yes 85.4%
No 14.6
Overall, whether or not you renegotiate or use performance fees, how do your manager fees, on average, compare with the level of fees a year ago?
Significantly lower 6.3%
Somewhat lower 25.0
About the same 61.5
Somewhat higher 7.3
Significantly higher 0.0
The results of Pensionforum are based on quarterly surveys of a universe of 800 corporate and 250 public pension plan sponsors. Because of rounding, responses may not total 100 percent.
