CHICAGO — Executives from the world’s largest money manager are making a run for defined contribution assets.
And they are moving fast.
Since UBS Global Asset Management, Chicago, launched its DC group in June, officials there have wasted little time in rolling out target-date funds, and partnering with a record keeper to offer semi-bundled services to DC plans.
Drew Carrington, executive director and head of defined contribution and retirement solutions at UBS Global Asset Management, said the time is right to move into the defined contribution market.
UBS’ first step was to roll out target-date funds in August that adopted the strategy of incorporating Treasury inflation-protected securities into these funds. That’s necessary because target-date funds sometimes rely too heavily on equity, Mr. Carrington said.
“We believe what participants need most is inflation-adjusted, longevity-protected replacement income, which will guide them closer to covering their retirement needs,” he said.
“We don’t have to dethrone Fidelity (Investments) or Vanguard (Group) to be a success,” Mr. Carrington said. “It’s not a requirement that we immediately become the largest manager of DC assets to be successful.” He declined to say if UBS had any market-share targets.
“We have a business plan, and our goal in the first year is to create some buzz around the products to get plan sponsors and consultants interested in what we are saying. We’ve had a couple good talks so far,” he said, declining to name any potential clients.
The decision to enter the defined contribution market followed conversations with UBS’ defined benefit plan clients, he said.
“In many instances, as plan sponsors contemplated making changes to their DB plan, such as making investment changes, reducing the benefits available by freezing, closing, looking to terminate, they wanted to make changes to their DC plan as well. I’d say 60%-80% of sponsors that make changes to their DB are making DC plan changes as well. That’s why we put together a task force to convert our strengths of asset management in the DC space,” he said.
Mr. Carrington said UBS’ competition will come more from investment-only shops like AllianceBernstein Inc., New York, and Barclays Global Investors, San Francisco, than from bundled providers.
“We’ll run into the usual suspects. Fidelity and Vanguard won a lot of business in the first-generation products, but over time, a number of plan sponsors will go back and revisit their first-generation solution. We’re more likely to be compared to firms like AllianceBernstein and BGI,” he said.
UBS is looking to target plans with $500 million or more in assets.
“That is really our sweet spot, but it’s not a hard floor. With automatic enrollment on the rise, there are smaller plans we would consider doing business with,” he said.
Following the launch of the target-date funds, UBS’ next step was to partner with a record keeper, Affiliated Computer Services Inc., said Mr. Carrington (Pensions & Investments, Oct. 15).
“We went out and looked for a non-manufacturing record keeper. This way, we can address plan sponsors about the full spectrum of their retirement plan needs. Partnering with ACS, they take care of the administrative side and we, of course, focus on the investment side. It’s not quite bundled, but it’s a preferential arrangement,” said Mr. Carrington.
“Plan sponsors and not in the business to be plan sponsors. They are employers seeking to offer benefits to attract and retain employees,” said Mr. Carrington.
Next up is addressing the longevity issue, with annuities possibly playing a role.
“We’re looking at longevity as a critical piece of the puzzle. There isn’t an effective combination of longevity investing and target-date funds out in the market. We’re working on what we could do in that space,” said Mr. Carrington, declining to elaborate.
However, BGI recently rolled out longevity-based target-date funds (P&I, Oct. 15). It is offering an annuity as part of a multipart investment option called SponsorMatch. Unlike a typical target-date fund, when a SponsorMatch fund matures, participants get annuity payments from age 65 until death. Like target-date funds, the SponsorMatch funds’ asset allocation changes over time, with the annuity allocation starting at 5% at age 25 and growing to 53% at retirement.
Of its competitors, Mr. Carrington said, “We know what we do well and we believe we could put out the best, most unique product to the market.”
UBS executives also are considering offering customized target-date funds to megasized plans.
“There’s a lot of ground shifting in this space right now. Mega and jumbo plans want to do it themselves. We will look at a next generation of those solutions as well,” he said, declining to elaborate.