401(k) World: DCIO Managers Adjust to Fee Pressures

Defined contribution investment only asset managers have played a vital role in the retirement plan ecosystem as it has evolved. The largest managers have at least 100 funds available on recordkeeping platforms, with leader Fidelity Investments boasting 435, followed by BlackRock Inc. at 230, according to the most recent PLANADVISER DCIO survey.

But these fund managers have also faced myriad business challenges in recent years. Continued fee pressure and an uptick in shopping for the right funds has plan sponsors increasingly embracing collective investment trusts and passive strategies—pushing out the once DCIO-dominant actively managed mutual fund.

“In a world that’s been so dominated by the S&P 500, as the world’s best-performing asset class for some time, active managers have truly struggled to justify their fee,” says Michael Francis, co-founder and head of the advisory Francis LLC. “At the same time, the big indexers—the Vanguards and State Streets and Blackrocks and Fidelities of the world—have engaged in a pretty healthy price war that has driven down the cost of just attaining sheer alpha and buying the asset class.”

Passive strategies in mutual funds and exchange-traded funds are projected to surpass active strategies for the first time this year, according to research from Cerulli Associates. Francis says there are also some types of investments—primarily in fixed-income securities—with which active managers can still add value for clients.

“It’s pretty straightforward there to find strategies and investment managers who will consistently add value, even over a 20- or 30-basis-point asset management fee,” he says. “But when it comes to equities, it’s tough sledding, especially if you’re in the large-cap category, or even more so in large-cap growth.”

Adding to the challenge, some indexes are now “pushing the boundaries of prudent diversification,” Francis says. “A lot of the DCIO guys and gals who are particularly sensitive to [the Employee Retirement Income Security Act] and the prudent-person rules about diversification are finding it increasingly difficult to keep up with a market driven by seven stocks.”

Bundling Strategies and Services

DCIO asset managers who can bundle their active and passive strategies, and those who also have recordkeeping capabilities, are best positioned in such an environment, according to Francis.

“If you have investment products to sell and can also cut a deal on the recordkeeper side, that’s a pretty powerful hammer to swing, when you’re head-to-head with other DCIO operations,” he says.

Meanwhile, the price war on the passive side is widening the fee gap. In response, the DCIO asset managers are re-examining their business models, looking for ways they can continue to add value and potentially unlock new revenue streams, according to industry players.

One answer, for many DCIO asset managers, has been the shift into collective investment trusts. While plan sponsors like CITs because they typically have lower fees than mutual funds, some DCIO asset managers were initially concerned about cannibalizing their existing mutual fund business.

“That [cannibalization issue] may be true, but CITs are more about top-line growth and what’s going to help us continue to grow and continue to win mandates,” says Kevin Murphy, senior vice president and head of workplace retirement sales for Franklin Templeton.

Cerulli research also shows that assets in CITs now exceed those in mutual funds for DCIO asset managers.

Managed Accounts

Another area of focus for DCIO asset managers when thinking about revenue, Murphy says, is personalized advice solutions, or managed accounts. While some plan sponsors have welcomed managed accounts for participants, growth has been somewhat slow due to concerns about the costs and potential litigation risks. Still, Murphy expects the market for such solutions to continue growing.“We think that more personalized solutions are the future of the [qualified default investment alternative], because of the data and technology available now,” Murphy says. “We really see that as a green-field / blue-ocean opportunity.”

Murphy believes DCIO asset managers can also drive revenue by leaning into smaller plans, which are a growing market thanks to legislative changes in the Setting Every Community Up for Retirement Enhancement Act of 2019 and the SECURE 2.0 Act of 2022, which made it easier for smaller sponsors to join pooled employer plans to provide retirement benefits to their workers.

“It feels like the industry is doing a good job creating more competitive, more streamlined solutions for small and midsized businesses in response to the government regulations,” Murphy says. “We can create very structured solutions that are vetted through a fiduciary with world-class asset managers.”

Adding Value for Advisers

No matter which size plan they are serving, DCIO asset managers might also find a competitive advantage by making themselves more accessible to plan advisers, who prefer, when all other things are equal, DCIO asset managers that are responsive to questions about strategy or investment, says Steve Wilkinson, CEO of k(quote) and a partner in and director of operations for Monarch Plan Advisors.

“If the adviser has questions, it should be easy to get information from the DCIO so they feel comfortable with it,” he adds. “Or it could be that the DCIO family is helping them with resources they can use to service their clients, such as a high-level market review or a look at how they can tie their strategies into their service model.”

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