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Portfolio > Asset Managers

DCIO market consolidating, maturing

By Lisa Barron

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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.

Smaller managers who came to the DCIO game late have also been stymied by the growing use of target-date funds since the passage of the Pension Protection Act of 2006, which defined them as a qualified default investment alternative.

“The market share of target dates within DC is expected to continue its growth trend (from 5 percent of all DC mutual fund assets in 2007 to 12 percent in 2012) as more plan sponsors turn to the strategy as a QDIA,” Strategic Insight said in a recent report.  “Across distribution channels, target-date mutual funds are projected to grow to $1.2 trillion over the next five years, more than twice the June 2013 assets of $534 billion.

In other words, if a manager doesn’t carry the same TDF products as companies like Fidelity and T. Rowe Price do, they may lose out on those DC assets, explains Brown.

“Re-enrollment hurts too. It’s not just new employees, but they are coming back to some companies and saying we’ve changed the menu so we should re-enroll all of your participants. So they get a lot of them to re-enroll in TDFs. If you had 100 percent opportunity to get DC assets before, now you have just 60 percent up for grabs. The rest are in proprietary target-date funds,” he said.

Still, with the DCIO market growing, what can managers who want a piece of the pie do?

“You have to have dedicated staff that is highly familiar with the market,” said Rick Meigs, the founder and president of Portland, Oregon-based 401khelpcenter.com. “You have to focus on the key platforms and top-producing retirement advisors. Those are crucial, especially RIAs. RIAs and consultants are the ones that are really driving this and are the gatekeepers. So you have to focus on them.”

Brown agrees that strong relationships are essential and offers a few other tips. “One is to cut expenses.  Cut back on some of the field resources and leverage other sales forces, retail and institutional. Maybe restructure compensation, and instead of having six specialists have three that will go after sales and follow up.”

He also suggests focusing those resources on smaller groups of advisors and record keepers. “Maybe go after 10 instead of 30, or six instead of 10. And try to get on to the preferred list.”

Indeed, in 2012 Hearts & Wallets conducted a survey of gatekeepers who managed mutual fund companies for 401(k) platforms. The results showed that the average number of managers on the platform was 188 but just 11 were on the preferred list, getting the bulk of the flows.

“They were getting 57 percent of the sales, so the other 109 are fighting for the other 43 percent. And maybe 30 percent of that goes into TDFs, so it’s even tighter,” Brown said.

Finally, he recommends trying to roll out new value-added programs. “Figure out what else they guys need. Look at practice management and trying to help them manage their offices and hope that earns good will.”

Above all, said Meigs, managers should persevere as the DCIO market continues to mature. “Further down the line, more plan sponsors, medium and smaller sponsors, will take another look at their investment menus, which means more opportunity.  It will continue to grow and attract more players.”

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