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.
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.
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.