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Special Report: DCIO managers

Bundled account assets falling by wayside

Jessica Sclafani said more DCIO managers are beginning to look for business from smaller DC plan sponsors.

Popularity of target-date funds, indexing help push DCIO growth into high orbit

Defined contribution investment assets under management are surging thanks to DC sponsors' greater use of target-date funds, index investments and open architecture strategies.

At the current rate, assets under management for DC investment-only mandates should exceed the AUM of bundled accounts in a few years, not only validating efforts by the biggest players in the DCIO market but also encouraging smaller DC asset managers to enter the market.

"Broadly speaking, the unbundling of the 401(k) market has supported DCIO managers," said Jessica Sclafani, director of retirement practice at Cerulli Associates Inc., Boston.

"There's been a steady influx of DCIO assets," explained Chris Brown, founder and principal of Sway Research LLC, Newton, N.H. "A lot of money is flowing to target-date funds and passive investments."

Total DC assets under management reached an estimated $7.8 trillion last year, of which $3.8 trillion was DCIO, according to Sway Research's most recent annual analysis of the DCIO market. Mr. Brown uses a proprietary model based on publicly available data from the Investment Company Institute and the Employee Benefit Research Institute.

For the past 10 years, the compound annual growth rate for DCIO was 7.2% vs. 5.8% for total DC assets, Mr. Brown said. By 2022, total DC assets are projected to reach $10.4 trillion, of which $5.5 trillion will be DCIO, he added.

"The pressure is on the bundled providers to open up," said Mr. Brown, referring to sponsors' investment lineups. "It's become more difficult for record keepers to use just their own products" to attract and maintain clients.

At Vanguard Group Inc., DCIO assets under management outnumber bundled AUM — $634 billion to $480 billion as of year-end 2017. DCIO assets took the majority share of Vanguard's defined contribution AUM at the end of 2014.

"We have benefited tremendously from open architecture," said James Martielli, head of defined contribution advisory services at Vanguard in Malvern, Pa.

The growth in DCIO AUM hasn't cannibalized Vanguard's bundled business, he added: "These are different decisions" for sponsors.

He said Vanguard's DCIO business has been propelled in part by sponsors' increased use of target-date funds, especially because they are the overwhelming choice for qualified default investment alternatives. Of the $634 billion in DCIO AUM, target-date funds account for $266 billion at Vanguard, he said.

No cannibalization

DCIO has provided a big chunk of the defined contribution assets at T. Rowe Price Inc., Baltimore — $307.1 billion out of a total $671 billion as of Dec. 31.

"There's a lot of activity in target-date funds and stable value," said Michael Davis, who leads the DCIO team as head of U.S. institutional defined contribution plan specialists.

Mr. Davis said the DCIO business doesn't conflict with or cut into T. Rowe Price's bundled business. In fact, the DCIO team learns from the research and consumer behavior work of the firm's record-keeping business. "When we go into the marketplace, we rely on the active insights of the record keepers," he said.

T. Rowe Price's DCIO business seeks clients "across the board" in terms of plan assets, said Lorie Latham, senior defined contribution strategist. "The midmarket is eager to learn from the larger market." Stable value funds and target-date funds are big contributors to the firm's DCIO business, she added.

Target-date funds are "a huge area for growth" for State Street Global Advisors, said David Ireland, senior managing director and head of global defined contribution at SSgA, Boston. Target-date funds account for about 20% of the U.S. business thanks to their role as sponsors' QDIA, he said. The annualized growth rate for the target-date AUM has been 30% for both the three-year and five-year periods.

SSGA is one of the largest pure-play DCIO providers with $349 billion in U.S. DCIO assets under management and another $115 billion in overseas AUM, primarily in the U.K. and Australia.

Expanding business

SSGA has been taking its DCIO business beyond providing investments, Mr. Ireland said. The firm has more than 40 specialists in participant communication, record keeping practices, public policy and plan design strategies. "We want to be a resource to plan sponsors," he said.

Although SSGA emphasizes index investing, which accounts for 90%-plus of DCIO assets, "there's a place for active," said Mr. Ireland. SSGA provides some actively managed "niche asset classes" in the developed international equity and emerging markets equity categories, he said.

The median size of SSGA's DC clients' plan assets is $2 billion, but nearly one-third of the more than 300 clients has assets of $250 million or less. DCIO expansion plans include seeking more clients in smaller categories as well as adding 403(b) plan clients to its predominantly 401(k) client roster, he said.

Like SSGA, BlackRock (BLK) Inc. (BLK), New York, is trying to distinguish itself from DCIO peers via additional services.

For example, it offers an interactive calculator, LifePath Spending Tool, that helps participants estimate retirement spending based on their current age and retirement savings. This calculator incorporates risk, longevity and capital market assumptions, said Nick Nefouse, managing director and co-head of the LifePath series of target-date funds.

"Additionally, the tool integrates mortality tables, providing a better understanding of long-term spending needs," he said. "Individuals aren't actuaries. Let's teach people how to spend down in retirement." The LifePath tool is based on an asset allocation of 40% equity/60% fixed income.

BlackRock had $887 billion in U.S. and Canadian DCIO assets under management as of March 31. The LifePath target-date franchise accounted for $200 billion.

Broadening market

As more sponsors embrace DCIO, more providers are looking at smaller DC plans, said Ms. Sclafani of Cerulli Associates.

When her firm polled DCIO asset managers about the greatest growth opportunities, 32.4% cited the $100 million to $249.9 million asset market, according to a Cerulli study published in September 2017. The 35 managers were responsible for more than $3 trillion in DCIO assets.

Another 29.4% mentioned the $25 million to $99.9 million in assets market. Plans with less than $25 million in assets received 20.6% of the vote.

The DCIO managers are "increasingly cognizant of midmarket plans," said Ms. Sclafani, referring to the $100 million to $249.9 million market as the "forgotten segment."

In the target-date arena, DCIO investment managers are willing to concede that the largest providers — such as Vanguard, Fidelity and T. Rowe Price — will grab a majority of the assets, she said.

DCIO target-date fund managers "have expressed they understand they are unlikely to compete with the larger providers in terms of assets, but they are still happy with participating — gathering a relatively smaller share of the target date fund market — given the opportunity the target-date fund market represents as the QDIA of choice," she added.

The same philosophy holds true for the broader market. When asked why some providers are just recently entering the DCIO market, Ms. Sclafani responded: "Why not? You shouldn't dismiss the size of the overall market." A small piece of a big market is still worth the effort, she added.

One newcomer to DCIO is Washington-based ICMA-RC, which announced last September that it was offering some DCIO investment strategies to private-sector plan after having served as a record keeper for public plans for more than 45 years.

"We're looking to diversify," said Craig Lombardi, managing vice president of DCIO, noting that ICMA-RC is focusing on plans with DC assets of $20 million to $100 million.

ICMA-RC is offering its VT Plus Fund and certain VantagePoint target-date funds to the DCIO market.

The stable value VT Plus Fund is "our bell cow," said Mr. Lombardi, using a term that describes the lead cow of a herd. "We're telling an investment story by leading with stable value and showing other funds."

The stable value fund accounts for $9.8 billion of the $28.6 billion in DC assets under management in plans for which ICMA-RC is the record keeper.

The private-sector DCIO business has secured $140 million in AUM during its first three months. Mr. Lombardi said it will take two to three years to determine its success.

Mr. Lombardi said the multimanager approach of the Vantage funds and the collective investment trust structure of the stable value fund and Vantage funds are important selling points in the DCIO market. ICMA-RC serves about 9,000 public plan clients, with deferred compensation plans (74%) and 401(a) and government 401(k) plans (21%) accounting for most of its business.

Another relatively recent entrant in the DCIO market is MassMutual Retirement Services, Enfield, Conn., which created a special DCIO team in April 2015 led by Aruna Hobbs, senior managing director and head of institutional investments.

"We wanted to grow our AUM in different channels," said Ms. Hobbs, adding MassMutual is seeking to capitalize on DC sponsors' greater interest in open architecture and in multimanager investment approaches.

Of $75 billion in DC assets under management, DCIO accounts for $22 billion; Ms. Hobbs said she hopes to raise that number to $24 billion by year-end.

"The small to midsize market is where we have played the best," said Ms. Hobbs, referring to DC plans with assets in the $150 million to $200 million range. Eventually, MassMutual will seek larger plan clients, she said.

Noting that large-cap equity markets are "saturated," Ms. Hobbs said MassMutual's DCIO business is paying special attention to the midcap equity and small-cap equity categories as well as to stable value.

Like its record-keeping business, MassMutual's DCIO business emphasizes active management and the 401(k) plan market. Ms. Hobbs said MassMutual's DCIO efforts won't interfere with its record-keeping, bundled approach. "Bundled is a different product," she said. "It's apples to oranges compared to DCIO."