According to Strategic Insight’s (SI) most recent report, “Addressing the Large Plan Markets,” plans with more than $100 million in assets account for 68%, or $3 trillion, of DC assets (including 401(k), 403(b), 457, profit sharing and other similar plans) as of year-end 2011. Despite the impressive size of the large-plan market in dollar terms, fewer than 1% of all DC plans have more than $100 million in assets.
“The large DC plan market has long been highly concentrated. This means that fund management firms seeking distribution opportunities with this part of the market must take an ‘institutional’ approach,” said Bridget Bearden, research analyst at SI and author of the report.
“Addressing the Large Plan Markets” focuses on the unique product and servicing needs of this highly concentrated DC plan segment, also called “institutional DC.” The report leverages data from Simfund MF and affiliate PLANSPONSOR surveys, and relies extensively on interviews conducted with key executives across asset managers, recordkeepers, consultants and custodians.
Popular product structures for institutional DC are mutual funds, collective funds and unitized custom products (investment options designed for a single, specific plan). Institutionally priced mutual funds are gaining traction among large-plan sponsors, demonstrated by the growth in R6 mutual fund share classes, or share classes designed specifically for large and mega DC plans. As of March 2012, R6 share classes held $64 billion in assets. Collective investment funds, which can be less expensive than ‘40 Act mutual funds, are benefiting from improvements in reporting driven by participant fee disclosure regulations.
“Expanded fee disclosure will increase the scrutiny of plan costs and influence product choices in the large-plan market,” Bearden said.
Despite operational impediments cited by recordkeepers, there is market demand for unitized custom products (both target-date and single asset class) among institutional plan sponsors. This demand is further supported by the fact that 13% of plan sponsors with more than $50 million in assets have custom target-date funds in place, according to the 2011 PLANSPONSOR Survey.
Gatekeepers to the institutional DC market, including recordkeepers and investment consultants, provided insight into best practices for building relationships and for investment monitoring. One example of a relationship building best practice highlighted by gatekeepers is understanding their positioning within the DC market. Asset managers should be aware of how the gatekeeper’s business is doing and where the investment consultant or recordkeeper ranks relative to peers in terms of number of institutional clients. Recordkeepers are open to fund managers’ assistance in remaining competitive and improving their platforms.