Current Focus
The latest research from defined contribution investment only (DCIO) distribution researcher Sway Research found that the long-running bull market and improving net sales are boosting DCIO asset bases. As of a year ago June 30, the average manager experienced 12-month asset growth of 12%. Sway further projects that, by the end of 2022, DCIO assets will soar 45% to $5.5 trillion, for a 54% share of the retirement asset market.
Still, DCIO providers acknowledge that they face challenges in a crowded marketplace, with the majority of investment sales going to low-cost index funds. Nonetheless, by highlighting products that are unique, and supplying support to retirement plan advisers, DCIO providers are finding that they can stand out.
“The landscape has gotten much more complicated due to the fiduciary rule changes and how the market has reacted to them,” admits Mike DeFeo, managing director and head of DCIO at Voya Investment Management in New York City. “It has become much harder for DCIO providers to sell product because sales are less transactional and driven more by the home office in terms of gatekeepers and getting shelf space. But because it is getting harder to earn the right to be included on those approved lists, here at Voya our key account people are spending a lot of time with those gatekeepers to gain approvals,” he says.
When working with the gatekeepers, Voya’s sales team focuses on “everything a professional buyer would be interested in: consistency of performance, investment philosophy, and cost, to deliver the best value they can,” DeFeo says. “This has resulted in an increased use of passive and index options, as well as clean shares without revenue sharing.”
While DCIO providers say the Department of Labor (DOL) fiduciary rule has negatively affected their business in terms of the majority of flows to retirement plans outside of target-date funds (TDFs) going to low-cost index funds, they also say it prompted many plan sponsors to overhaul their investment menu, and this movement has created opportunities for DCIO providers.
Fidelity Investments’ most recent survey of plan sponsors found that 92% of plans consult an adviser. “As they work with advisers, sponsors want to understand how effectively their plan is helping participants adequately prepare for retirement, and this provides an opportunity for both the defined contribution [DC] and DCIO market,” says Jordan Burgess, head of specialist field sales at Fidelity Institutional Asset Management in Smithfield, Rhode Island.
“Eighty-two percent [of plan sponsors] reported making a plan design change, with 56% of the changes to increase participation and 47% to increase savings rate,” Burgess says. Of those making a plan design change, the vast majority (83%) are “typically adding new investment options, replacing an underperforming fund, or moving to an index fund or a fund with a lower share class.”
Erin Donnelly, executive vice president and head of DCIO at Nuveen in New York City, agrees that the fiduciary rule had been prompting sponsors to overhaul their investment menus. “It has created opportunities for advisers to review TDF strategies and perhaps replace them,” she says. “In that it has raised the bar, it has been creating new prospects for us,” and, as proof of that, Donnelly notes that Nuveen’s DCIO sales have been up more than 30% a year for the past three years.
TDF Approaches
David Blanchett, head of retirement research at Morningstar Investment Management in Chicago, notes that with all net positive flows into retirement plans effectively going to passive funds, “if a DCIO firm is not going to be the low-cost provider, it is more important than ever to position the unique value of their investment options beyond performance—products that don’t have great representation on retirement plans, such as international bond funds or TIPS [Treasury inflation-protected securities]. DCIO providers should take the five or 10 best ideas that consultants could use. Depth is more important than breadth.”
Many of the investment managers tout the unique attributes of their target-date fund products. J.P. Morgan Asset Management has “both a fully active TDF suite and a suite that is a mix of passive and active,” says Mike Miller, head of retirement distribution, in Chicago. “Performance has been strong on both, and I feel very optimistic because of these TDF capabilities that other asset managers cannot deliver.”
Burgess, on the other hand, cites Fidelity’s three options: active, passive and hybrid TDFs. He also points to adviser and plan sponsor choice in the breadth of multiple share classes and a broad range of collective investment trusts (CITs).
The TDFs that Manning & Napier offer give portfolio managers leeway to adjust the glide path in line with market developments, says Shelby George, senior vice president of adviser services for the firm in Rochester, New York. “We manage a glide range rather than a glide path,” she says. “This allows for adjustments to equity and fixed-income exposure and sub-asset classes. For a TDF to take a proactive approach to risk management is unique.”
Natixis Investment Managers offers a TDF series that invests in companies sensitive to environmental, social and governance (ESG) issues, which resonates among Millennials, says Ed Farrington, executive vice president of retirement strategies, in Boston. “Our sustainable future target-date range has ESG as the theme for investments. That might be a good fit for a firm with a large Millennial work force or that does sustainable work,” he says.
In addition, with Baby Boomers starting to retire in droves, Natixis’ TDFs are designed to take people through retirement by sustaining their assets, Farrington says. “I think there are many innovations being developed for those two groups, and I don’t find the DCIO market challenging as long as you bring solutions suitable for them.”
Some firms find their value proposition outside of TDFs. ICMA-RC has a stable value fund that it has offered to public-sector retirement plans since 1991, notes Craig Lombardi, managing vice president and head of DCIO at the firm, in Washington, D.C. “Last September, we opened it up to private-sector plans,” he says. “In a rising rate environment, that provides a very interesting opportunity. The second thing that sets us apart is that our TDFs are open architecture, multi-managed, using best of breed.”
Adviser Services
Besides offering investment products, DCIO providers are often an important resource for advisers for education and services. “More and more advisers are asking for help specifically with their business, either how to develop new client relationships, maintain existing client relationships or stand out in the marketplace,” DeFeo says.
One initiative that Voya recently launched is Voya Cares, “to raise awareness among advisers that families with special needs are being underserved by the financial services industry,” DeFeo says. “The special needs could be due to a birth defect, catastrophic injuries or age-related issues. Think of the financial hardship of dealing with this while trying to save for retirement. We are helping advisers provide services to [those participants] and stand out.”
Natixis has an internal group called Portfolio Research and Consulting comprised mostly of certified financial advisers (CFAs), Farrington says. Their job is to “help advisers with portfolio construction from an agnostic point of view,” he says.
Mass Mutual produces thought leadership for advisers about topics “such as adding value to the CFOs [chief financial officers] at the retirement plans they serve, or how to protect data through cybersecurity,” says Aruna Hobbs, head of institutional investments for retirement plans for the company, in Enfield, Connecticut.
In addition, DCIO providers are using Form 5500 data to help advisers build prospecting lists, and some offer investment policy statement (IPS) and plan fee benchmarking tools, notes Jessica Sclafani, director, retirement, at Cerulli in Boston. The services that DCIO providers offer advisers continue to expand, indicating their commitment to enhancing these relationships.
The 2018 PLANADVISER DCIO Survey highlights the features of the top 10 providers.
Art by Armando Veve