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DCIO market is growing, but asset managers face challenges

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The market for defined contribution investment-only (DCIO) plans will reach $4.1 trillion by 2020, up from three $3 trillion in 2015, a 37 percent rise. But the DCIO market is facing growing challenges, most notably downward pressure on asset management fees.

So reports Hearts & Wallets in its 2015 annual competitive landscape and benchmarking study, “The State of DCIO Distribution.” Now in its 9th year, the study surveyed 30 asset managers with about $900 billion of DCIO assets under management and roughly 100 retirement plan intermediaries with more than $60 billion of DC assets under administration.

The report forecasts the market for DCIO assets — investment management mandates awarded within qualified retirement plans such as 401(k), 403(b) and 457 plans — will constitute just over half (51 percent) of the DC market by 2020, up from 47 percent currently. Fueling the rise are sales gains.

In the first half of 2015, 70 percent of the 30 asset managers surveyed recorded positive net sales, up 16 percentage points from the 54 percent who posted gains in 2014 (a “historically bad year,” the report notes). DCIO sales improvements are not, however, as high as in 2013, when 80 percent or more of managers regularly produced net sales “in the black.”

“There remains a great opportunity to manage the workplace savings of millions of Americans via a dedicated DCIO sales and marketing effort,” says Hearts & Wallets Partner and Co-founder Chris J. Brown. “Today, the stakes are higher, product requirements stricter and sales more difficult to earn.”

The report cautions that DCIO asset managers face “mounting challenges” from target-date funds. More mindful of portfolio expenses, investors also increasingly favor low-cost passively managed funds, which are less profitable for asset managers than actively managed funds.

Reflecting this shift, one ­third of mid-­tier consultants surveyed by Hearts & Wallets plan to increase DC plan placements of passively managed, large cap U.S. stock funds. This compares with just 14 percent who plan to increase placements of similar actively managed offerings.

The resulting decline in fees has “negatively impacted” DCIO sales at firms of more than 3 in 5 asset managers during the year past. Just 1 in 10 of those polled say the trend was positive for their firms.

“To really compete in the DCIO market, portfolio fees must be kept at or below median simply to make it past initial screens,” Brown says. “And that is only the price of entry.”

Nearly half of retirement advisors surveyed, who this year support an average of 33 DC plans with nearly $60 million of assets, define “low expenses” as an expense ratio in the lowest 25 percent for its category. Another 21 percent peg the lowest 10 percent, suggesting “only passive products will suffice for these advisors.”

See the chart on the next page showing the share of DCIO managers in net redemptions.