William McDermott likes to run in long-distance races, and he says with pride that he has convinced five of his six children to run with him. “I love the camaraderie of running with 10,000 other people,” said Mr. McDermott, who has been running the institutional defined contribution business at Goldman Sachs Asset Management in New York since February 2010. Mr. McDermott said he likes long-distance running because it appeals to his competitive nature, which is being tested as part of the corporate version of a marathon — building up Goldman's institutional defined contribution business.
Although GSAM's parent, Goldman Sachs & Co., is one of the biggest names in financial services, the institutional DC business is relatively modest compared with its peers, with an estimated $23 billion at year-end 2010.
Mr. McDermott has spent much of his career in the retirement industry, including a combined 20 years at big record keepers — Fidelity Investments and what is now Aon Hewitt. Prior to joining GSAM, he was executive vice president for corporate markets at Equitable Life Insurance Co.
In an effort to expand GSAM's presence in what he says is a $4 trillion domestic 401(k) market, Mr. McDermott said his goal is organic growth, rather than acquisitions. GSAM won't enter the record-keeping business, he added.
What are your target markets? We look at three markets. The first is the large defined contribution plan sponsor. There are 380 plans out there that have over $1 billion in assets — corporate plans, 457 plans, as well as 403(b) plans.
The second is platforms. How do we build products and distribute products that can easily be used by the major record keepers?
The third market is the adviser-sold business — a very important business to us. They have traditionally been in the smaller end of the marketplace, but many of them have grown to the hundreds of millions of dollars of assets.
The area of greatest focus is the large end of the marketplace. Goldman Sachs Asset Management in the past hasn't had a dedicated defined contribution sales force. Now, we have people located across the country that just specialize in working with the largest plans.
How do you approach these markets? Different markets adopt at different speeds. If you look at the larger end of the market, they're conservative in some ways. They want tested ideas before they roll it out to their tens of thousands of employees. The adviser market: They'll try a new concept or look at a new asset class for their market. As we're designing products, it's really a recognition of where does a product best fit, where is it going to get quicker takeup.
Have you made specific strategy changes? Our involvement in custom target date is a greater focus for us than it has been in the past. As companies and advisers say they want to go to an open architecture in a target-date fund, they're looking for someone to give them the support that they need on designing the glidepath (and) selecting the underlying managers. That's a natural for us.
Today, the companies that are doing this are the largest companies. They're saying not one fund company is the best in all asset classes. They're saying, “I want to create the best in each of those asset classes”; and when one underperforms, we have the ability to change one asset manager without changing the whole target-date fund. They also want to have a custom glidepath.
What are the most important issues facing the DC industry? There are three key areas. One is plans looking for ways to diversity their risk; the second is to find new sources of growth within the portfolios; and the third is in the broad category of protection.
In diversifying risk, if you look at asset allocation for defined benefit plans compared with define contribution plans, you'll see asset classes that exist in the defined benefit side (such as) broad alternatives — hedge funds or hedge fund replications. They exist because they provide a value on the pension side, yet they have been excluded to a degree on the defined contribution side because of questions about will they be understood (by participants), or could participants hurt themselves by investing in them. I think there's a real opportunity to bring those diversifying asset classes to defined contribution.
Do you advise plans to choose a package of alternative investments, rather than stand-alone options? Our philosophy is that if it's going to be a discrete option in the core lineup, go with a packaged approach (featuring several alternative investments) where the volatility is manageable. If it's going to be a stand-alone, we are concerned in making sure people understand the option and understand what the volatility could be.
What's the lure of such products? The lure is I can get a better risk-adjusted performance by adding these classes, so I can either get a similar performance at a much lower risk or I can get better performance at the level of risk that I'm willing to take. The step that companies need to take — and many of them are — is going to customized target-date funds.
What's the biggest challenge in achieving this? The challenge is the same with all DC plans: How badly do (companies) want to make the change because it involves a communication to employees. But we are seeing companies take those steps.
What are the new investment opportunities for DC plans? The growth markets as we call them — it's hard to call China an emerging market. We think the opportunity to get additional alpha, to get additional returns from those growth markets is really important. If you look at defined contribution plans, asset allocation to those types of asset classes is 1% to 2% at most. We think there's an opportunity to be investing in that to a much greater extent than exists today.
What offers protection? Stable value continues to be very popular. The other is lifetime income. It's absolutely in our product road map of things we want to participate in the marketplace. We want to have an offering that is tied to the target-date. We see target dates being the centerpiece for 401(k) plans and lifetime income to be a big piece of that. We're evaluating the various approaches in the marketplace.
What we want to do is bring something to the market that (plan sponsors are comfortable with) from a fiduciary perspective. I think that's the first screen you need to get through. There's concern around single-insurer risk. Is that risk minimized or reduced if there are multiple insurers? How is it packaged — a fixed annuity or a variable annuity? There are advantages and disadvantages of both. The good news for anyone getting into this is that we're in the first inning. Of the $4 trillion (in domestic 401(k) plans), not even $1 billion is in the guaranteed lifetime (option) inside the plan. We think there are a lot of advantages for it to be inside the plan, from a cost perspective.
How does the DC industry regain the public's trust after 2008? I think it's by bringing new solutions to the marketplace. ... Much of what we're looking to design is to smooth the ride; the DC business, in my opinion, has been much too volatile. Investors will be looking for products that are much smoother, that still give you exposure to growth yet at the same time don't give you the bumps.