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.