Some 401(k) Sponsors Still Fans of Unbundled Services

The defined contribution investment only (DCIO) market composes 12% of all 401(k) plans, or approximately 63,000 plans, according to a Spectrem Group study.

The Spectrem research report said unbundled usage is highest among those with plan assets of $50 million to $199 million and that those going the unbundled route are more likely than those bundling to bring in a consultant to advise on their plan decisions. Sponsors of plans with $200 million or more in assets are the least likely to use unbundled purchasing.

Also in the Spectrem DCIO report:

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  • Sponsors of plans with assets of $50 million or more most often cite the CFO as leading the decision process about plan purchases/hiring.
  • Sponsors of plans using unbundled purchasing offer slightly fewer investment options to their participants than other sponsors (16 versus 19). They are also more likely to add new investment options over the coming 12 months.
  • Employee benefit consulting firms are the type of consultant mentioned most often by both unbundled and full-service purchasers. Among unbundled purchasers, registered independent advisers (RIAs) rank second along with third-party administrators (TPAs).
  • Unbundled purchasers are less likely than others to use a consultant that is affiliated with one of their plan service providers. They are also more likely to pay fees rather than commissions to the consultants and advisers they use.

Mutual Funds a Popular Investment Vehicle

Regarding investment selection, the Spectrem study found:

  • Mutual funds are the investment vehicle used most frequently among unbundled purchasers, followed by GIC/stable value funds and collective funds.
  • About 40% of these sponsors say they anticipate making changes in the types of investment vehicles they use. One-quarter say they plan to add an annuity-based income option to their plan and 13% say they will make greater use of collective funds.
  • Respondents ranked a strong performance track record and low investment management fees as most important in the selection and evaluation of plan investment providers.
  • More than 20% of sponsors rate four factors very important in the selection process (i.e., 4 or 5 on a 5 point scale), and at the same time rate their satisfaction with the performance of their current providers low (i.e., 3 or lower on a 5 point scale). These factors are the range of options available from the provider (25%); investment management fees (22%); the manager’s commitment to the DC business (21%); and the performance track record (20%).

The data used was taken from Spectrem Group’s 2008 DC Market Needs study. The research was based on a survey of 1,052 decisionmakers responsible for the selection and evaluation of plan service providers at companies with defined contribution plans.


Fueled by Target-Date Growth, DCIO Firms Up Sales Efforts

Much of the spending increases in the DCIO market are being directed at new sales force hires and marketing programs designed to support retirement plan advisers, according to a study by Sway Research.

Asset managers are on track to increase dollars spent on defined contribution investment-only (DCIO) sales and marketing efforts by an average of 28% in 2008, according to a release from Sway Research.

Chris J. Brown, principal of Sway Research, said in the press release that “some of the increase in spending is in response to mounting competition from other asset managers as well as increased flows into proprietary target-date portfolios, all of which are placing greater pressure on DCIO executives to meet aggressive sales goals.” Nearly one-third of the 14 managers surveyed by Sway for this study did not expect to meet 2008 DCIO sales goals, even before the fall credit crisis depressed the U.S. equity markets.

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The growth of target-date funds has already begun to impact flows from DC plans into investment-only products. According to the gatekeepers from nine leading DC platforms that took part in a survey for the Sway study, assets under administration invested in target-date portfolios will increase from an average of 12% to 31% by 2015. The Sway report says both DC platform gatekeepers and retirement advisers overwhelmingly prefer using target-date portfolios as a qualified default investment alternative (QDIA) option.

The study found a significant gap in DCIO productivity among investment management firms, with leading firms generating well over $1 billion of sales per salesperson—four times as much as firms at the low end of the range. “This suggests that even without another increase in spending in 2009, many managers are in a position to enhance DCIO productivity and profit margins by improving the ways that sales and marketing resources are being used,” Brown said.

More information about the study, Best Practices in DCIO Sales and Marketing: Harnessing Value-Add Programs to Build Brand With DC Platforms and Intermediaries, is available at www.swayresearch.com.

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