DCIO Providers Under Increasing Sales Pressure

Leading distributors are consolidating assets, and new groups are growing in influence.

Many defined contribution investment only (DCIO) asset managers are fighting to maintain positive net inflows this year, according to Sway Research.

Leading distributors are consolidating assets and new groups are growing in influence, namely third-party fiduciaries, distributor 3(38) modelers and investment scorecard providers.

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Many employer-benefits specialists, or aggregators, have been busy growing through acquisitions or affiliations. With each new acquisition, these firms grow in scale and importance, and they are now beginning to raise demands on DCIOs for custom investment vehicles to lower DC plan costs and increase their competitive advantage. Not only are defined contribution (DC) assets consolidating with these aggregator firms, but leading recordkeeping platforms are also expanding market share and beginning to demand more of DCIO managers for access to their staff and placement within their 3(38) models and select lists.

Sway estimates that DCIO assets will reach $4.1 trillion by the end of the year, up 7.9% from $3.8 trillion at the end of 2017. At year-end, DCIO assets will comprise 50% of assets in DC plans. Proprietary assets, those managed by an affiliate of the plan administrator, will account for a 40% market share. The remaining 10% is invested in company stock and via brokerage and mutual fund windows.

The DCIO managers with positive net sales tend to have assets exceeding $100 billion, or asset bases under $10 billion. The steady shift of assets from active to passive management in core U.S. equity categories, such as large cap blend, and the explosive rise of target-date solutions, together tend to lead to more DCIO assets flowing out than coming in. More than half of the managers Sway surveyed said they have had net outflows in 2017 and the first half of this year. The situation was reversed for those managers at the upper and lower ends of the DCIO asset spectrum, as only one third of these firms experienced net outflows.

There are 15 firms in the aggregator universe, and they managed roughly $640 billion of DC assets, or 8%, at the end of 2017. Their share in the small (<$10 million) and mid-size plan ($10 million to $50 million) segments is 32%, but they are gradually moving up market, and with each new acquisition or affiliation deal, their influence on plan menus grows. Sway believes that within the next five years, aggregators will have $1 trillion or more in DC assets.

More than half of DCIO executives that Sway interviewed said that 20% or more of sales at their firm are coming from aggregators and that it is getting increasingly difficult to access investment personnel at these key partners.

Looking ahead, Sway expects DCIOs to focus even more on aggregators, which can deliver assets in return, but that aggregators are also likely to increase their demands, which will make it more costly for DCIOs to service them.

Neuroscience Center Pension Plan Fiduciary Settles ERISA Dispute

Under DOL scrutiny, the Illinois-based employer has agreed to restore nearly $420,000 to its defined benefit pension plan.

The U.S. Department of Labor (DOL) has entered into an agreement with the fiduciaries of the Neuroscience Center LLC Defined Benefit Pension Plan, with the firm consenting to restore $419,758 to the plan.

According to a DOL statement, the agreed-upon restoration is part of a consent judgment approved by the U.S. District Court for the Northern District of Illinois.

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The settlement follows an investigation by the DOL’s Employee Benefits Security Administration (EBSA) that found violations of the Employee Retirement Income Security Act (ERISA) by fiduciary and sole trustee Steven Devore Best. According to the DOL statement, EBSA investigators found Best used monies from the plan for the Neuroscience Center LLC’s operating expenses, funded other companies he owns, and made personal loans to himself. All of these actions, DOL says, were taken in direct violation of ERISA. Best conducted most of the unauthorized transactions in 2014 and 2015.

“Our investigation and the settlement that followed restores hard-earned retirement benefits to employees and protects their future,” says Employee Benefits Security Administration Regional Director Jeffrey Monhart, in Chicago. “This case should remind all fiduciaries that they must work solely in the interest of plans and participants.”

The consent judgment enjoins Best and the Neuroscience Center LLC from serving as fiduciaries to any employee benefit plan subject to ERISA in the future. The court ordered the restored monies to be allocated to participants’ pension accounts, with the exception of Best’s own account, and appointed an independent fiduciary to distribute benefits to eligible participants.

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