Data & Research October 29, 2008

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.
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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.

Compliance October 29, 2008

Northern Trust Hit with Securities Lending Lawsuit

The fiduciaries of BP Corp. North America Inc.'s retirement plans have accused Northern Trust Co. of breaching their fiduciary duties by not disclosing substantial securities lending losses.
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The representatives of BP’s defined contribution and defined benefit plans filed the federal court suit in Chicago charging Northern Trust Investments (NTI) and Northern Trust Co. (NTC) with carrying out imprudent securities lending activities that resulted in the losses. Those activities represented a breach under the Employee Retirement Income Security Act (ERISA), the suit claimed.

The suit charged that NTI was authorized to lend securities from four collective investment funds in which the plans’ assets were placed. The funds were benchmarked to different stock or bond indexes.

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The suit said NTI appointed NTC as the securities lending agent for the collective funds and delegated to NTC the discretion to manage the securities lending activities.

NTI shared a monthly fee equal to a percentage of the net income earned by NTC through the securities lending, but NTI did not share in any realized losses on the collateral investment, according to the suit.

The plaintiffs charged that the whole loss was allocated to the collective funds and investors, the complaint alleged.

Generating Returns

NTI told the fiduciaries that the purpose of the securities lending program was to generate a return through investment of the cash collateral received from borrowers of securities. The program would allow NTI to offset its expenses under the investment agreements with the plans, and further allowed the collective funds to better match the performance of their respective benchmark indices, the suit quoted NTI as saying.

The lawsuit alleged that NTI and NTC imprudently operated the securities lending program because a high percentage of the securities in the collective funds were loaned and the cash collateral for the loans was invested in collateral funds that were riskier than the collective funds’ aggregate risk.

The fiduciaries of BP’s defined contribution plans stopped additional BP participant contributions to, and transfers into, the collective funds in mid-October, according to the suit, and demanded that NTI and NTC distribute cash to the plans reflecting the value of the plans’ investment accounts without the securities lending-related losses.

NTI has refused to distribute the plans’ assets in cash and has informed the plan fiduciaries that NTI’s distribution would include interests in impaired securities.

The complaint in BP Corp. North America Inc. Savings Plan Investment Oversight Committee v. Northern Trust Investments N.A., N.D. Ill., No. 1:08-cv-06029 is available here.

Northern Trust Corporation announced in September it would “take certain actions” to support securities lending clients whose cash collateral is invested in five constant dollar, commingled investment pools hurt by recent market turmoil (see Northern Trust to Aid Securities Lending Clients).

Northern Trust said it expected to incur a pre-tax charge of approximately $150 million ($94 million after-tax or $0.42 per share) in the third quarter in connection with the securities lending action. The exact nature of the securities lending program was not detailed.

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