Asset Managers Weigh In on DC Plan Investment Trends

They foresee growth in the use of CITs, retirement income products and ESG investments.

By DJ Shaw

As registered investment adviser (RIA) aggregator firms continue to acquire smaller players in the defined contribution (DC) space, investment managers are starting to take notice of their growing influence in deciding DC plan investments, a recent study suggests. There has been a shift in distribution dynamics as many RIA firms look to centralize their investment analysis and research.

According to Cerulli’s “U.S. Defined Contribution Distribution 2021: Uncovering Investment-Only Distribution Opportunities” report, many aggregator firms have taken an institutional approach to their investment decisionmaking process, centralizing the due diligence and investment analysis at the home-office level. By doing so, they have taken much of the investment research and analysis responsibilities out of the hands of the firm’s field advisers, enabling them to spend more time helping plan sponsors with their plan design, participant education and communications, and recordkeeper oversight.

In addition to centralizing the investment research function, some RIA aggregator firms are leveraging their scale and investment expertise to create their own 3(38) investment manager open-architecture, white-label investment products and solutions. The report notes that 66% of managers believe aggregators have become a primary influencer in deciding DC plan investments in the $25 million to $250 million segment, and that rises to 68% for the $250 million to $500 million range.

“Managers that understand the investment decisionmaking process, adviser concerns and potential platform changes on the horizon will be well-poised to capture plan assets controlled by RIA aggregators,” says senior analyst Shawn O’Brien.

CITs Poised for Growth

Key DC plan decisionmakers, including advisers and consultants, continue to favor collective investment trusts (CITs) due, in large part, to their relatively low-cost structure and pricing flexibly, the Cerulli report notes. The firm recommends that target-date managers strongly consider CITs for their future target-date series launches.

The vast majority (92%) of managers currently offer a target-date series in a CIT, and 2021 has seen the use of CITs grow in place of other, traditional funds as the retirement vehicle of choice. Nearly all (97%) CIT providers cite lower costs as a very important factor when developing their CIT products. Other factors considered in development and distribution of CITs that managers found very important include having an additional vehicle offering for the existing investment strategy (78%), the ability to negotiate fees (72%), the ease of distribution (47%) and the speed of product development (38%).

In recent years, many CIT providers have lowered their investment minimums and, in certain cases, waived them altogether. Cerulli’s report finds that those with low or no investment minimums are more tenable investment options for smaller plans and advisers and could help promote stronger adoption down market.

Retirement Income

Retirement income remains a prime area of focus for asset managers and plan fiduciaries, as industry experts note there is no “one-size-fits-all” retirement income product or solution. Asset managers believe target-date funds (TDFs) with a retirement income vintage are most likely to capture the greatest new flows for in-plan options (38%), followed by a dynamic product (22%). Dynamic qualified default investment alternatives (QDIAs) that start participants off in an accumulation-focused vehicle—e.g., TDFs—before automatically transitioning them into a managed account offer participants the benefits of personalization as they approach their retirement years.

Slightly less than a quarter (21%) of target-date managers offer a target-date series with a guaranteed income component. Providers note that some plan sponsors are beginning to adopt TDFs with a guaranteed income component, but adoption is still far from widespread, Cerulli says.

Most defined contribution investment-only (DCIO) asset managers (63%) indicate that greater interest in retirement tiers will have a positive impact on their business. Plan sponsors looking to implement retirement tiers are likely to exhibit an interest in helping their retired employees navigate the retirement phase of their lives and may look to offer a suite of customized and off-the-shelf retiree-focused investments.

ESG Investing

A shift in political attitude has placed environmental, social and governance (ESG) investing back in the spotlight, Cerulli notes. Further guidance from the Department of Labor (DOL) may help plan sponsors and their fiduciary partners navigate their decisionmaking process as they implement ESG investment products.

Cerulli found that 65% of retirement specialist advisers believe ESG products will gain broader adoption in the DC market in the coming years, and 67% of asset managers believe interest in ESG investing will have a positive impact on their DCIO business, up 20% from last year. Despite a proliferation of ESG investment products, DC plan fiduciaries have historically been hesitant to offer ESG-branded investment products.

Several TDF managers indicate they plan to incorporate ESG principles into their investment process moving forward. The Cerulli report notes that many DC-focused asset managers run ESG screens on their investment products and third-party subadvisers regardless of whether their investment product is ESG-branded.

Retirement specialist advisers, on average, expect to add an ESG investment option to the plan menu for nearly one-quarter (22%) of their DC plan clients. The new, softer DOL stance on including ESG investments in plans covered by the Employee Retirement Income Security Act (ERISA) will likely help ease barriers to adoption within the ERISA-covered DC space, Cerulli notes.