feature | PLANADVISER May/June 2017

Up in the Air

DCIO insiders discuss challenges

By Lee Barney | May/June 2017
Page 1 of 5
Art by David Jien

The defined contribution investment only (DCIO) market is a formidable force, holding $3.5 trillion, or 48%, of the assets in defined contribution (DC) plans, according to Sway Research. These assets are expected to grow 26% to $4.4 trillion by 2020, at which point DCIO firms will hold 52% of all DC plan assets.

Nonetheless, despite this bullish outlook, DCIO firms—and DCIO groups, at the more traditional recordkeepers—are facing challenges and undergoing change, according to researchers and executives at these firms. “Fifteen years ago, when plan sponsors started to move to assets unbundled from recordkeepers, DCIO providers really saw an uptick in assets,” says Brian Donoghue, a partner with NEPC in Boston. “Today, the growth in assets for these providers has really flattened. That suggests a mature market.”

Market Shakeout
In addition, “a disproportionate amount of assets is going to a finite few DCIO providers,” says Mike De Feo, managing director at Voya Investment Management in New York City. “We think there will be an event that occurs at a firm or in the marketplace that will highlight the concentration of these assets, and intermediaries will look for alternatives” to the market leaders.

It has become necessary for DCIO firms to ensure that their products are approved by such “shadow fiduciaries” as Morningstar and Mercer, which vet funds, so that advisers will select them for the retirement plans they serve, says Gene Huxhold, senior managing director, investment only retirement plans, at John Hancock Financial Services in Chicago. These companies “dramatically influence what investments an adviser can offer in a plan, so it is important for us to know what they are doing and that they are looking at our better products.”

Likewise, because of the pending fiduciary rule “and potential liabilities, major wirehouses and broker/dealers [B/Ds] are putting guardrails on what funds their retirement plan advisers can select, so I need to make sure John Hancock is on that list as well,” Huxhold says.

The Move to Unbundled TDFs
Recordkeepers, such as Fidelity Investments, Vanguard and T. Rowe Price, that offer proprietary investments were the first to launch target-date funds (TDFs), and, as a result, they command more TDF assets than do TDFs managed by DCIO providers, Huxhold says.