The Markets February 13, 2020

TDFs, Passive Funds and Income Products Shape the DCIO Landscape

Sources say plan sponsors are beginning to realize the value of differentiating services—from retirement income solutions to securities lending capabilities—now that costs have come down across the board.
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Art by Tim Peacock


The most important development in the defined contribution investment only (DCIO) marketplace to consider is the fact that the lion’s share of assets are being attracted into the target-date funds (TDFs) offered by Vanguard, American Funds and State Street Global Advisors, says Chris Brown, principal and founder of Sway Research.

In fact, Sway’s third quarter 2019 report on DCIO sales shows that year-to-date through that quarter, DCIO assets were up an average of 14%—but Tier 1B firm’s assets were up 21.9%. Furthermore, year-to-date gross sales for the average Tier 1A firm were five times that of Tier 1B firms, 12 times the average of Tier 2 firms and 25 times the average for Tier 3. For context, Sway’s research breaks the DCIO market down into three tiers based on firms’ relative market share.

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While plan sponsors have been seeking the lowest cost offerings from their DCIO providers, James Martielli, head of defined contribution (DC) advisory services at The Vanguard Group, says that sponsors are beginning to realize the value of “differentiating services,” now that costs have come down across the board.

“When cost differences are small, it comes down to such details as execution and performance—how well you manage the portfolio,” Martielli says. “Do you offer securities lending? What do you offer that goes beyond cost? We are seeing that dynamic play out on the larger end of the market. On the smaller end, clients are catching up.”

Mike Swan, client portfolio manager for defined contribution clients at SEI Institutional, also thinks the pendulum might be swinging away from over-concentration on low fees.

“Being solely focused on passive investments and reduced fees is shortsighted,” Swan says. “The focus needs to switch to value. For instance, we think 3(38) fiduciary services will be beneficial in the long term for most plan sponsors. It reduces the conflict in making investment decisions and allows plans to take action more quickly.”

Vanguard has also found that many of its plan sponsor clients are examining the glide paths of their TDFs to ensure they are the right solution for the demographics of their plan, Martielli says. To date, “there hasn’t been a significant difference between custom and off-the-shelf TDFs,” he says.

To that point, there is increased interest among sponsors for managed accounts from DCIO providers, says David Blanchett, head of retirement research at Morningstar. Indeed, Hartford Funds’ clients are increasingly asking about managed accounts, says Dave Hescheles, national sales manager.

“While the defined contribution market is still dominated by TDFs, sponsors are beginning to realize that plans can embrace the models of traditional wealth management,” Hescheles says. “The customization is what excites us—the ability to bring best-in-class managers to participants with very attractive prices.”

Likewise, more Voya Investment Management clients are seeking collective investment trusts (CITs), which used to only be available at the larger end of the market, says Mike DeFeo, managing director and head of DCIO. More sponsors also are inquiring about environmental, social and governance (ESG) investment, DeFeo adds.

“ESG is talked about more than utilized, but talk is starting to drive some action, as well,” he says.

A big development that is bound to affect the DCIO industry in the coming years—due to the massive amounts of Baby Boomers retiring and the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act—is retirement income solutions, Brown says.

“While we have been talking about retirement income for 20 years, there really is a push now to figure out how to build income into products or deliver them as standalone in-plan offerings,” Brown says. “The SECURE Act has created opportunities for insurance wrap products to help participants hedge or minimize longevity and downside risk. This will be a clear way for DCIO providers to differentiate themselves.”

One recent example of such an offering was American Funds incorporating income into its TDFs, DeFeo notes. “More providers, including Voya, will be coming out with their own versions of that, including standalone retirement income offerings,” he adds. “Firms like Voya that have robust fixed income platforms are trying to figure out how to use that strength to provide unique investment opportunities in the market.”

Sponsors are increasingly interested in offering retirement income solutions, says Jordan Burgess, head of specialist field sales overseeing DCIO at Fidelity Institutional Asset Management. He notes that Fidelity’s annual Plan Sponsor Attitudes Survey has found that sponsors fear that 50% of their participants will not be able to cover essential expenses in retirement. This has also prompted 93% of sponsors to work with a financial adviser or investment professional, up from 70% in 2008, Burgess notes.

Moving forward, Voya is also exploring how to offer “access to private equity and other alternative levers and mechanisms that create wealth to retirement plan participants,” DeFeo says.

All in all, insiders point to a broadening of services by DCIO providers and a keener focus on the needs of participants and retirees.

Compliance February 11, 2020

Washington Update: Industry Turns Attention to Portman-Cardin Bill

The president’s budget proposal may be short on retirement reforms, but members of Congress are already looking beyond the SECURE Act.
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Art by Hayden Maynard


Even before the SECURE Act was passed, retirement plan industry trade associations were already setting their sights on what might be the next step, says Elena Barone Chism, associate general counsel for retirement policy at the Investment Company Institute (ICI).

“ICI supports efforts in Congress to seize on the momentum of the SECURE Act,” Barone Chism says. Many of the provisions in the Retirement Security and Savings Act, proposed by Senators Rob Portman, R-Ohio, and Ben Cardin, D-Maryland, “are very complementary to the SECURE Act.”

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Chris Spence, senior director, federal government relations at TIAA, agrees that the Retirement Security and Savings Act holds great promise for the industry, calling it the next “retirement reform 2.0.”

Of the many provisions that would make changes to employer-sponsored retirement plans and individual retirement accounts (IRAs), the ICI is keen on an additional catch-up provision that would permit those over the age of 60 to save an additional $10,000 each year in their 401(k) plans, she says.

“Another provision would provide for the indexing of IRA catch-up contributions, which are currently set at $1,000 and do not change—unlike other limits that are indexed for inflation,” Barone Chism says.

The law would also make two changes to “SIMPLE IRA” plans that the ICI thinks are steps in the right direction, she adds. The first would permit employers to make additional contributions on behalf of workers, and the second would permit these plans to offer Roth contributions, she says.

Furthermore, as the SECURE Act raised the age for required minimum distributions (RMDs) to from age 70 1/2 to age 72, the Portman-Cardin bill would further extend that continuum to age 75 in 2030, Barone Chism says.

“The bill would also create another type of automatic enrollment safe harbor that would not make it necessary for a plan to do nondiscrimination testing,” she says. “The thought is that the contribution formula under the current safe harbor may work for some employers, but there are other ways to structure the contribution formula that might be beneficial for other workplaces. This one would be designed to stretch the match to encourage employees to select a higher deferral rate.”

Other provisions of the bill are designed to streamline plan administration and increase operational efficiencies, Barone Chism continues. “One would consolidate various participant notices,” she explains. “Also in the category of improving plan administration, there is a provision that would amend the IRS correction program so that plans and IRA administrators can more often utilize the self-correction opportunity for inadvertent errors and avoid paying a significant filing fee to get the corrections approved.”

Other Priorities: Student Debt and Preventing Elder Abuse 

Aside from the Retirement Security and Savings Act, the ERISA Industry Committee is focused on efforts to help alleviate student loan debt, says Aliya Robinson, senior vice president of retirement and compensation policy. “We support matching contributions into 401(k)s for student loan repayment,” Robinson says. “That dovetails into the private letter ruling by the DOL [Department of Labor]. We also support expanding qualified benefits under cafeteria plans to allow student loan repayments.”

In addition, the ERISA Industry Committee supports the modification of the definition of highly compensated employees (HCEs) from the current $103,000 salary to $130,000, Robinson says.

With recent reports finding that most Americans lack an emergency savings account, and even among those who have one, the amounts being paltry, the ERISA Industry Committee also supports the creation of emergency savings sidecar accounts, she says.

There are also other bills TIAA is focused on, such as the Retire Act, Spence says. “This would modernize the delivery of plan documents and make it easier for plan sponsors to default participants into electronic delivery,” he says. “This probably will be reintroduced soon. We are also very focused on lifetime income provisions—anything we can do to improve access to annuities.”

Paul Richman, chief government and political affairs officer at the Insured Retirement Institute (IRI), echoes that sentiment, saying, “With the passage of the SECURE Act, the first comprehensive retirement package in more than a decade, we got a lot done, but we know there is more legislation we would like to see considered because there is a lot more to do to expand savings opportunities. We would like to increase access and utilization of lifetime income products to protect against the risk of outliving retirement assets. For instance, we would like to see standard use of QLACs [qualified longevity annuity contracts].”

IRI would also like to see more legislators “step up to the plate” to propose laws to protect the elderly against financial fraud, Richman says.

Time for Members to Weigh In

Two trade associations, The SPARK Institute and the CFP Board, are in the process of assessing which issues they would like the retirement plan industry to champion.

“Back in 2016, we organized a legislative and regulatory summit of 26 industry leaders for the purpose of defining our legislative and regulatory focus,” notes Tim Rouse, executive director of The SPARK Institute. “They offered up more than 50 ideas and then voted on the best ideas for SPARK to pursue. These were electronic delivery, lifetime income, open MEPs [multiple employer plans] and the expansion of auto features. The SECURE Act and DOL guidance on e-delivery checked off all four of those.”

Since the previous roundtable was so successful, SPARK is planning to convene another roundtable this year to assemble the next slate of issues to pursue, he says.

Likewise, the CFP Board, in conjunction with the Financial Planning Association and the National Association of Personal Financial Advisors, has formed a working group of 10 certified financial planners (CFPs) to propose issues for the government to pursue, says Maureen Thompson, vice president of public policy at the CFP Board. The group is refining eight to nine ideas that it plans to make public in the first half of this year and then take to policymakers, she says.

It is clear from all these efforts that the work to improve America’s retirement savings is far from done that that there will, undoubtedly, be even more ideas and proposals to come.

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