$460B in DC Plan Assets Could Take Wing

After years of extremely low turnover, retirement plan sponsors are giving serious consideration to altering their 401(k) plan recordkeeping relationships, a report says.

It’s review time, and with current assets in 401(k) plans estimated at $4.4 trillion by the Investment Company Institute (ICI), assets controlled by plan sponsors planning a move represents a $460 billion opportunity for providers that can effectively differentiate themselves in an increasingly commoditized marketplace.

Cogent’s Retirement Planscape report indicates that four in 10 (40%) plan sponsors are very likely to initiate a formal review of their plan over the next year. Meanwhile, 11% of all plan sponsors are already planning to switch providers during the same period.

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“We know that plan sponsors typically conduct at least a cursory review of their plan every two years or so to meet their fiduciary responsibilities,” explains Linda York, vice president of the syndicated research division at Market Strategies at Cogent and lead author of the report. “However, this year we are surprised to see four in 10 sponsors overall initiating a formal plan review, with an even higher proportion of reviews expected among larger plans.”

Nearly half (46%) of all mega-plan sponsors (those with $500+ million in plan assets) anticipate a formal plan review and 18% feel these reviews will trigger the need to move to a different provider, the report found. Comparatively, 40% of plan sponsors in the micro-plan segment (those with less than $5 million in plan assets) intend to conduct a formal review and just 14% within this segment anticipate actually switching.

As sponsors begin their review process, they are open to considering many more providers this year than in the past, York points out. “This is a red flag for incumbent DC recordkeepers that may find themselves under increased scrutiny,” she says. “At the same time, this is also an opportunity for new providers to make their move to capture new assets and more market share.”

The full report, first conducted in 2010, evaluates the competitive position of 39 plan providers on a variety of metrics, identifying the leaders in overall brand equity in the best position to capitalize on this future growth potential.

Fidelity Investments, Vanguard and Charles Schwab, the three top placeholders, still have a near lock on overall brand equity, according to the report, but several key challenger brands—Principal Financial Group, John Hancock Financial Services and T. Rowe Price—have moved into fourth, fifth and sixth places, respectively. “They are exhibiting strong positive momentum and are closing the gap with market leaders,” York says. Principal moved from fifth to fourth place; John Hancock notched up from sixth to fifth, and T. Rowe Price moved to sixth from 11th place.  

Cogent Reports conducted an online survey of a representative cross section of 1,471 401(k) plan sponsors from July 22 through September 2. Survey participants were required to have shared or sole responsibility for plan design, administration, or selection and evaluation of plan providers.

More information about annual Retirement Planscape, a Cogent Reports study by Market Strategies International, is at Cogent’s website.

Opportunity in Complexity for Investment Advisers

Consultants and financial advisers face strong opportunity in developing sophisticated investment strategies for their institutional clients, according to new research from Cerulli Associates.

Unforeseen risks, uncertain future equity returns and diversification challenges have institutional investors searching for new portfolio solutions, according to the latest issue of The Cerulli Edge – Institutional Edition. The report suggests more successful consultants and advisers are already embracing opportunities to help many types of institutional investors address complex challenges in evolving markets, including corporate retirement plans.

Cindy Zarker, a director at Cerulli, says many asset managers and investment consultants are finding new ways to help their institutional clients with custom solutions that go beyond the management of a single investment strategy.

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The report shows different institutional client segments exhibit many investment strategy commonalities, but each also has unique needs. Most institutions have increased their use of alternative investments in recent years to boost returns and dampen portfolio volatility, for example, but defined benefit (DB) and defined contribution (DC) retirement plans often have more liquidity constraints governing flows of assets, making it harder to efficiently incorporate alternatives. Advisers and consultants have a key role to play in helping retirement plans get over these hurdles, Cerulli says. 

Additionally, Cerulli notes that strong equity markets and a small rebound in interest rates propelled corporate DB plans as a group to their highest funded level in five years at year-end 2013. In this environment, many DB plans can be expected to implement a liability-driven investment (LDI) approach to de-risk their portfolios. Advisers and investment consultants are in a great position to help these plans replace riskier assets with more robust liability hedging.

Cerulli’s report also anticipates that more significant rise in rates can be expected in the relatively near future. As questions continue on if or when interest rates will rise, plan sponsors must balance de-risking goals with their need to secure continuing portfolio returns. Citing a recent BlackRock analysis, Cerulli researchers suggest that even when 100% funded, DB plan sponsors can benefit from a return-seeking component in their portfolio to sidestep the potential need for cash contributions—yet another opportunity for advisers and consultants.

Cerulli says effective client solutions combine advice and implementation elements. Cerulli places LDI, corporate DB plan resolution, outsourced chief investment officer (OCIO), and multiple asset-class solutions under this “umbrella of opportunity.”

When evaluating asset allocation, institutional investors continue to shift away from a style-box approach to a risk-based emphasis, Cerulli says, adding that risk-based portfolio construction sets the stage for greater use of unconstrained bond, absolute return, multi-strategy, and other investment approaches that do not fit squarely into traditional asset-class buckets.

Cerulli finds successful asset managers are organizing custom solutions services around multi-asset-class platforms in part to fend off rising competition from investment consultants. As the report explains, money managers both compete with and collaborate with investment consultants in serving the institutional marketplace. The research suggests it is in asset managers’ and investment consultants best interest to align their focus on serving institutional clients’ interest in customized portfolio building.

Fee consciousness among institutional investors has also risen; they do not want to overpay for beta, Cerulli warns. For this reason, many investment consultants recommend that their clients incorporate passive strategies in their portfolios, especially for large-cap equity, which is generally considered a more efficient market. To optimize portfolio expenses, 42% of surveyed consultants endorse investing passively in large-cap equities.

Whatever the specific solutions investment consultants provide for retirement plan clients, asset-allocation skill and multi-asset capabilities are critical, Cerulli says.

Information on how to obtain Cerulli reports is available here

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