The number of defined benefit (DB) plans sponsored by US corporations continues to decline, while the merging of existing plans is making it harder for newer money managers to gain a foothold in the retirement sector.
In 1985, DB plans hit a peak, totaling 112,000. Less than 24,000 remain, according to the 1999 Pension Benefit Guaranty Corporation’s recent annual report. The largest decline exists among smaller plans. Those with less than 100 lives have decreased from 90,000 in 1985 to about 11,000, according to the report. Plans with between 100 and 999 lives also declined from 19,000 in 1985 to less than 11,000 currently.
Meanwhile, a trend of merging existing plans has caused the number of larger plans to increase. Plans ranging in size from 1,000 lives to 9,999 lives have increased from 4,017 in 1980 to approximately 4,257 in 1999. DB programmes with more than 10,000 participants have increased from 469 in 1980 to 749 in 1999.
While the decline in overall plans results from programmes being terminated, it is also attributable to increased merging of corporations. As corporations merge, they typically consolidate their retirement plans. The merging of smaller plans into larger plans will probably benefit well-established money managers, but it will make it more difficult for smaller firms to get established, according to Jeff Nipp, a consultant with Watson Wyatt Investment Consulting.
Larger plans typically have larger amounts of assets, making them more attractive to investment firms – larger pools of assets can be gathered with fewer client accounts to manage. Nipp explains that larger plans, however, tend to be more stringent in requirements for asset managers. Larger plans typically require an established track record and minimum assets under management. With that in mind, the trend toward larger retirement plans will continue to help larger firms, but make it harder for small or newer firms to gather assets.
Nipp sees two strategies for new firms. Money managers can gather assets from high-net-worth individuals or other funding sources to generate a performance track record and to meet minimum assets under management requirements. The drawback? Pension plans may view such firms primarily as high-net-worth managers, instead of retirement plan firms with specific capabilities for investing tax-qualified assets.
Another approach Nipp outlines is when portfolio management teams can develop track records with established investment firms and then venture out on their own. The challenge with this approach is to convince pension plans that the founding members of the new firm were responsible for the performance record of the larger, established firm, he adds.
While presenting an investment performance history is important, other factors can help newer firms address the increasingly sophisticated needs of plan sponsors, says Bruce Clark, president of Arrowstreet Capital in Boston. The firm, with $320m in assets under management, formed last July when he and Peter Rathjens, formerly with PanAgora Asset Management, left to establish their own firm. Since then, the giant CALPers pension fund has invested in the firm under its manager development programme. “Plan sponsors are clearly becoming more sophisticated, so it’s important for newer firms to have sophisticated services,” Clark explains. “We allow clients that perform a portion of their asset management internally to participate in our investment committee meetings. This helps them address broader issues, such as asset allocation and managing risk.”