With the $2 trillion Japanese pension fund market on the verge of a revolution, U.S. mutual fund managers are circling like vultures to get a piece of the action.
Most of the largest U.S. defined contribution plan service pro-viders are analyzing how to attack that market, the second largest in the world in terms of retirement assets and private savings.
Officials from Fidelity Investments, Putnam Investments, Bankers Trust Co., INVESCO, J.P. Morgan Investment Management Inc. with American Century Investments, Morgan Stanley Inc., Mellon Bank Corp., Goldman Sachs & Co., American Express Financial Corp., Federated Investors and SEI Investments said their companies are either in Japan or are seriously considering a move.
Others likely to be active there include Merrill Lynch & Co., Citicorp, Chase Manhattan Bank, and Capital Research and Management Co.; officials at those companies didn't return phone calls.
"Japan is an enormous market and it's very important that you be there and be there early in the financial reform process," said Ron O'Hanley, executive vice president and chief operating officer of Mellon Global Asset Management, Boston.
Solutions to crisis sought
Like many other countries, Japan faces a retirement crisis and is looking for solutions.
With other "Big Bang" financial reforms off to a roaring start in Japan, observers are confident this momentum could lead - in as little as four years - to legislation that will let Japanese companies offer some type of defined contribution plan as their primary pension vehicle.
"This is a no-brainer. Defined contribution plans will be established eventually in Japan. Legislation will go through," said Matthew Goodman, director of governmental affairs for Goldman, Sachs Japan Ltd., Tokyo, and a former attache for the U.S. Treasury in Japan.
Japanese corporations are being pushed to look at alternatives by huge unfunded pension liabilities that will be exposed for the first time soon under financial disclosure reforms. One estimate put the amount of Japanese unfunded, investible defined benefit plan assets in 1997 at between $600 and $800 billion.
Some say between 50% and 80% of the roughly $2 trillion Japanese pension market is unfunded.
Courting the Japanese
In preparation, U.S. companies, such as Fidelity Investments and INVESCO, have hosted visitors from Japan interested in their programs and systems.
Fidelity is holding a series of educational meetings in Japan in November for corporate executives, said Roger T. Servison, managing director, executive vice president and head of corporate policy, new business and market development.
"We're helping to educate regulators, policy-makers and corporations to understand our system and the 401(k) system in the United States," he said.
As many as 26 U.S. money managers already have set up shop in Tokyo. They hope they will have built up enough name recognition with individual investors through retail mutual fund sales and close enough relationships with Japanese pension fund sponsors to capitalize on when legislation allows defined contribution plans.
American Express Asset Management Ltd., Minneapolis, only started building investment management capabilities in Japan about two years ago. But, "we think that our brand-name recognition will help us significantly in attracting both defined benefit and eventually, defined contribution plan clients," said Steve Roszell, president and chief executive officer.
"The big question is how important will name-brand recognition be in Japan?" said Mr. O'Hanley of Mellon Global. "In the United States, the big name custodial banks lost market share when individual participants began to want name-brand mutual funds.
"We're all in the same boat here, trying to gauge the extent to which the experience of U.S. investors will translate to Japanese investors."
Fidelity may go solo
Few foreign companies likely will try to penetrate the Japanese defined contribution plan market alone. Only Fidelity stands a chance of pulling it off.
"No one has fully assessed the opportunity that exists in Japan for direct marketing to plan sponsors. Some companies are approaching the Japanese market as they did the U.S. (market).
"For example, Fidelity seems, from the licensing agreements they're seeking (from the government), to be seeking to take a direct approach. Others have tried this approach before and failed. Not many companies will try this way," said Mr. Roszell.
Fidelity has been managing defined benefit plan assets and offering retail mutual funds in Japan for some years, both directly and through brokers. The mutual fund lineup offered in Japan will be expanded soon and the systems side is being beefed up, including the addition of Japanese language and character capabilities.
"We have experience in exporting our 401(k) plan platform to other countries. .*.*. We're adapting the platform now so that we can offer similar 401(k)-style services in Japan," said Fidelity's Mr. Servison.
Talks under way
Officials from almost every company interviewed said they were in talks with Japanese companies about collaborating in the defined contribution plan market.
Mr. O'Hanley said he couldn't name Mellon's new Japanese partner, but said Mellon will help the company set up investment trusts (the Japanese equivalent of U.S. mutual funds), which it will then subadvise.
"American companies are going to hook up with Japanese partners. You're dead in the water if you don't do it with a partner. The Putnam model (Putnam recently struck a deal with Japan's Nippon Life) is attractive. They got the big fish," said John Mensack, product manager for global markets at SEI Investments, Wayne, Pa.
Mr. Mensack said SEI is in discussions now with several potential Japanese partners.
Karina J. Istvan, a consultant at Cerulli Associates Inc., Boston, said mutual fund companies probably will find it more cost-effective to handle such services as record keeping through local partners, especially Japanese trust banks.
Only the best features
Observers expect the Japanese defined contribution model will incorporate only the best features of current 401(k) plan design.
"The Japanese are very good at taking the best out of what others have done," said Ms. Istvan.
"I think the Japanese have a pre-disposition to buy semibundled plans and will likely leapfrog to an open fund architecture, in which they can offer the best funds from multiple managers from the outset.
"And I think price and expense ratio issues will rise much more quickly to the surface than they did in the United States, prompting an earlier move to passive management strategies," she said.
Mr. Servison of Fidelity said Japanese representatives have been interested in making plan design changes, such as eliminating loan provisions and limiting the frequency of contributions and account transfers, which can cut administrative costs between 30% and 50%.
Meanwhile, some large U.S. mutual fund vendors are not paying much attention to Japan yet.
"We monitor Japan and we're interested in the spread of defined contribution plan globally. But Japan is not the highest priority here. We're not jumping up and down and we won't be the first ones in," said William McNabb, managing director with The Vanguard Group of Investment Cos., Malvern, Pa.
"We don't think our penetration of the U.S. market is complete. Whenever you go off on a global strategy, there are opportunity costs," he said.
Officials at United Asset Management Corp., Franklin Resources Inc., T. Rowe Price Associates Inc., Charles Schwab Co., John Hancock Financial Services and State Street Bank & Trust Co. said their companies aren't looking at Japan, either.