In Practice August 10, 2012

As DC Plans Change, so Do Opportunities for Asset Managers

Although plan sponsors are reluctant to completely overhaul their plans, evolving defined contribution (DC) plans are creating challenges and opportunities for advisers, a report found.
Reported by

DC plans would be significantly different than what is currently offered to participants if they were started today, according to “The State of Large and Mega Defined Contribution Plans: Investment Innovation and the Plan Sponsor Perspective.”   

Asset managers need to focus efforts on the large and mega markets, as those markets are likely to implement new designs quicker than smaller plans, according to Cerulli Associates’ research study on the bigger DC plan marketplace. This is especially true for the high end of the mega market, where opportunities will develop first.

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Asset managers seeking DC assets need to build relationships with plan sponsors and consultants as these groups have the most influence on investment selection. Recordkeepers still hold some influence in the small end of the large market. The 401(k) market provides the greatest asset opportunity, and despite the maturity of the market, Cerulli expects that changes in investment menu design will create additional opportunities.

 

(Cont’d…)

New ideas to simplify DC plan investment menus are being touted by asset managers. Assets in standalone investment choices will remain relatively flat as target-date funds continue to garner assets. Investment menus will continue to evolve, opening the door for products that have had limited success in DC plans, such as alternatives and managed accounts.

Asset managers should expect best-in-class funds based on performance in traditional asset classes to continue to win mandates, but in the long term, a fund’s role in an asset-allocation strategy will become more important. Asset managers should begin thinking about how to position funds in this new environment.

Asset managers should wait until requested to develop a collective trust version of a strategy. However, those that need to use an outside trust company to bring a collective trust to market should explore their options and develop a relationship in order to speed up time to market, should the need for a collective trust arise.

The report also indicates that consultants are the primary source of information for plan sponsors. Only 12% of plan sponsors indicate that conferences are the initial source of defined contribution plan information. Asset managers can more effectively reach plan sponsors through consultant relations or directly than by speaking at conferences.

 

The Markets August 10, 2012

Advisers Should Educate Clients About Alternatives

A heightened interest in alternative investments among advisers and clients calls for education about those investments' role in portfolios, a source at Russell Investments told PLANADVISER.  
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Institutional investors are making significant allocations to alternatives—on average 22% of total assets, according to Russell Investments’ 2012 Global Survey on Alternative Investing. In addition, up to one-third of respondents are expecting to increase their allocations to alternatives over the next one to three years. Market uncertainty, high volatility and low return expectations all contribute to this increase, said Mike Smith, consulting director for Russell’s U.S. adviser-sold business.

The survey participants are experienced alternative investment professionals, representing institutional assets in 2012 exceeding $1.1 trillion. Advisers and their clients may not represent billion-dollar portfolios but may find the survey information useful, Smith said.

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Alternatives can be used as portfolio diversifiers, he said. “And hopefully through this diversification, you’re bringing in a smoother and more predictable return pattern for the overall portfolio,” he added.

Despite interest in alternatives, barriers remain. Liquidity, transparency and restricted access are common implementation concerns, Smith said. For individual investors, investment minimums have put quality alternative products out of reach, but these barriers are now being addressed or removed altogether. New fund vehicles offer daily liquidity and greater transparency, and the challenge now is evaluating the investment and maintaining the quality in a liquid product.

Survey respondents said education is the key to increasing demand for alternatives. Smith said advisers must ensure clients have an understanding of the role alternatives should play (i.e., diversification, return driver or both) and what can be expected from adding them to a portfolio.

Market volatility can cause people to abandon their overall investment strategy, so alternatives can smooth this problem and help clients maintain long-term investment goals, Smith said. “We think it’s a great opportunity for investors, and we do believe these types of investments can be very beneficial over the long run,” he added.

Advisers should set the expectation that alternatives will not return 20% a year, for example. They should also educate clients on quality versus non-quality alternative investments.

The survey has been conducted since the 1990s, and Smith said education about alternatives has remained important to the respondents. “When you start talking alternatives, there is a learning curve attached to that,” Smith said.

Russell’s global survey report can be downloaded here: http://www.russell.com/institutional/research_commentary/alternative-investing-survey.asp.  

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