The defined contribution investment-only market has been making rapid headway for more than a decade, and its growth today is outpacing that of the DC plan market overall.
DCIO assets currently total $2.7 trillion, up from $2.2 trillion a year ago, accounting for 46 percent of the total DC market, according to research firm Hearts & Wallets. That number, it projects, will grow to $3.6 trillion by 2018, about half of all assets in the DC market by that time.
In the investment-only part of the DC world, asset managers sell their services through the platforms of nonaffiliated recordkeepers. Their targets: 401(k) and other DC plans that include offerings from multiple asset managers.
While the numbers are encouraging, DCIO managers today face mounting challenges in what is now effectively a mature market.
“The DC market is still growing as it continues to take up the slack left by the dwindling DB space. The industry continues to evolve, continuously consolidating, expanding and splintering off into new areas. Although it is more difficult for new managers to get a foothold in the space than in previous years, there are still opportunities,” said Christine Marez, conference director of Financial Research Associates, which is bringing its DCIO Market Forum back to New York this week. “DCIO managers need to find ways to distinguish themselves from their peers to get recognized by the advisors, consultants and platforms.”
That’s especially true when the latest trend is bifurcation of the DCIO market, with early entrants reaping the biggest benefits.
“You used to have big firms doing a lot of business, but smaller firms were doing well, too. But now it’s very tough for smaller funds to get much new business in the door,” said Chris Brown, principal of Hearts & Wallets and co-author of its latest in-depth study of the DCIO market, “The State of DCIO Distribution: 2014.”
“A big part of it is those fund families have committed a lot in sales and marketing dollars and bodies in the field. They may have a dozen or more dedicated people just to selling or working with advisors in the field, compared to three or four in smaller firms. Their marketing budgets are three times as big, so they have gotten really big.”
Hearts & Minds surveyed 28 asset managers for this year’s report, the ninth DCIO study dating back to 2004, and found for the first time that one-third are on track to experience annual DCIO net redemptions.
H&W also breaks the survey participants into three groups based on DCIO AUM and sales and marketing resources. This year, it found that Tier 1 managers, the biggest, are spending nearly twice as much on DCIO sales and marketing as Tier 2 managers and nearly 1.5 times as much as those in Tier 3, on average.
In addition, when the expenditures are compared to annual gross sales, Tier 1 managers are making a smaller investment relative to the assets taken in than Tiers 2 and 3 managers. At the same time, larger staffs and marketing outlays produce even more sales and a widening gap between Tier 1 managers and those trying to get there, according to H&W.