As open architecture returns to favor with large defined contribution plans, investment-only firms are prepping new offerings to grab a larger piece of the DC pie.
Executives at these and other money management firms are betting enhanced asset allocation funds and customized investment strategies will give them that opportunity:
•Barclays Global Investors, San Francisco, plans to offer more aggressive lifecycle funds and products geared to the distribution phase;
•Pacific Investment Management Co., Newport Beach, Calif., is launching customized investment portfolios for the DC market; and
•AllianceBernstein Inc., New York, will launch new customized target-date funds in July.
Until recently, bundled plan designs were all the rage. But now, as more plan executives scrutinize fees and want increased investment flexibility, the unbundled approach is garnering renewed interest, according to asset management executives.
Kristi Mitchem, managing director and head of the U.S. defined contribution business at BGI, said the firm plans to roll out new products and services in the next 18 months, in an effort to target large defined contribution plans.
“We want to be as dominant in DC as we are in (defined benefit). The DC market is coming around to us and it’s time to make a big push,” Ms. Mitchem said.
At BGI, which had $200 billion in defined contribution assets under management as of Dec. 31 — including $13 billion in its LifePath asset allocation funds — officials continue to see market opportunities for lifecycle funds, Ms. Mitchem said. She also said there has been demand from plan executives for more diversified options within the lifecycle funds.
“Our market share (of DC overall) is 5%, and we plan to double that in the next five years,” she said.
On BGI’s list is a focus on enhanced lifecycle funds, distribution products, and possibly investment advice. Plus, BGI will add an emerging markets component to its lifecycle funds in the third quarter, she said.
“We have REITs, TIPS and now we’re going to add emerging markets” to the funds, she said. “We are also looking at global REITs and global fixed income. But we will not add those classes immediately. It’s something we are looking into.”
Customized strategy
PIMCO also plans to roll out a new customized investment strategy. Stacy Schaus, senior vice president and defined contribution practice leader, said PIMCO this month plans to roll out Treasury-inflation protected securities as part of a custom portfolio in a mutual fund or collective trust for defined contribution plans. The portfolio, known as a diversified real asset trust, will include commodities and REITs, she said.
“We’re see a lot of the assets positioned in the DB market come into DC in a big way,” Ms. Schaus said. One advantage of the PIMCO portfolio: “A plan sponsor will be able to add a single option instead of three,” she said.
PIMCO’s $60 billion in defined contribution assets as of Dec. 31 accounted for 10% of the firm’s overall book of business, and new DC strategies will allow PIMCO to grow, said Ms. Schaus.
In July, AllianceBernstein will introduce customized target-date funds, separate from its $342 million retirement-date funds. AllianceBernstein had $15.4 billion in defined contribution assets as of Dec. 31.
Richard Davies, senior managing director for institutional defined contribution services at AllianceBernstein, said target-date funds are the next wave in open architecture, and disclosure of fees — which is less clear in bundled arrangements — is driving that.
“That has slowly, but surely, coming to the large plan marketplace. (Target date) is the last holdout in the bundled market. The record keepers are fighting hard for this turf, but more plans see that open-architecture makes sense — for flexibility and cost savings,” said Mr. Davies.
Mr. Davies said AllianceBernstein will offer large DC plans lifecycle fund strategies with the advantage of customization, including a choice in how much of the portfolio is actively or passively managed. Plan executives will be able to select the passive/active combination and change the mix later, if they choose, said Mr. Davies.
Most lifecycle fund strategies offered by bundled providers do not offer customization; the funds consist of mutual funds selected by the provider.
Each target-date retirement portfolio in the series is a daily-priced separate account that invests in a set of collective investment trusts that represent the component asset classes, he said.
AllianceBernstein portfolio managers will handle the active portion of the new target-date portfolios; Northern Trust Global Investments, Chicago, will manage the passive side. Seth Masters, chief investment officer for blended strategies at AllianceBernstein, said other managers could be added if clients make that request.
“The ability to add other managers to the mix is important to plan sponsors,” he added, “but many plans would rather not jump into a potentially complicated multimanager target-date structure on day one. They can be added at a later time.”
AllianceBernstein will target defined contribution plans with $500 million or more in assets, or those plans that would be able to amass at least $100 million in lifecycle fund assets, Mr. Masters said.
Beyond lifecycle funds
Other firms are also looking beyond lifecycle funds.
BGI executives are weighing what kind of distribution products they want to offer. “We need to have a solution for participants drawing down assets. There has been all this emphasis on accumulation, but the focus is changing,” Ms. Mitchem said.
She added, however, that a partnership with an annuity provider is not on the table because BGI officials have not seen the demand for it.
Investment advice given by a money manager, which is allowed under the Pension Protection Act of 2006, is on the radar, said Ms. Mitchem. “I would expect BGI to do something in the advice space, but there are some conflicts as the legislation reads now. We will wait for the DOL clarifications,” she said.
All of the asset managers said that increased scrutiny of defined contribution plans — as they gain importance in retirement programs — is pushing the move back to unbundled approaches.
“DC was traditionally delegated to the HR and benefits department, but as DC becomes more important to these companies, the people that know the most (about investments) are becoming involved,” Ms. Mitchem said. The renewed interest in DC is in part because of companies freezing their defined benefit plans and enhancing their DC plans, she said.
Mr. Masters said: “(The Pension Protection Act of 2006) will throw a light on how expensive bundling has been. As plan sponsors begin to recognize the environment today is quite different from a year ago, there is a tremendous willingness to consider rethinking of the bundled model.”
