The looming retirement crisis in the United States has made it very clear that every participant in the management of retirement assets is now under increased pressure to support the investment needs of the aging U.S. population.
In the face of this oncoming crisis, each of these participants — from investment managers to actuaries to consultants to custodians and the plan sponsor — needs to review their activities to determine what steps can be taken.
With regard to investment managers in particular, one obvious area where progress can be made toward heading off this crisis relates to the performance of portfolios. Of course, improving the quality and consistency of returns is not trivial, and, in many cases, can be subject to the cyclical nature of the markets.
So while improving gross investment returns is a laudable and important goal, careful attention to how investment managers are compensated for their efforts can provide another, arguably more predictable, way to have a positive impact on the net returns that the plans and individuals will actually see.
To this end, compensating managers using performance-based fees can be, in many instances, a preferred strategy for plan sponsors and consultants compared with an all asset-based management fee structure.