New research documents that so-called “aggregators,” growing in both scale and importance, have become a primary focus of many DCIO sales and marketing units.
These aggregators, so called because they share a common strategy of growth via acquisition or affiliation, are now beginning to raise demands on DCIOs for custom investment vehicles to lower DC plan costs and increase their competitive advantage, according to the latest in-depth research report from retirement and defined contribution investment-only (DCIO) distribution consultancy Sway Research. According to the report, not only are defined contribution assets consolidating with aggregator firms, but leading recordkeeping platforms are also expanding market share and beginning to demand more of DCIO managers for access to their staff and placement within their 3(38) models and select lists.
‘Access’ Able?
More than half of DCIO executives surveyed for the report indicate that 20% or more of DCIO sales at their firms are now coming from aggregators, and that it’s getting more difficult to access investment personnel at these key partners, because – according to the researchers – every DCIO is knocking on their doors seeking access. Sensing opportunity, several aggregators have asked DCIOs for custom collective trust-based portfolios with lower fees for sale through their platforms, and DCIOs are responding in the affirmative.
Approximately three out of five DCIOs surveyed have already created such products or expect to by the end of 2018. For their part, four of six aggregators surveyed indicated that “collective pricing,” which this tactic has been dubbed, is very or extremely important to the future of their firms.
There are 15 firms in the aggregator universe, and they managed roughly $640 billion of DC assets at the end of 2017. This equates to about 8% of the overall DC market, but these firms tend to focus efforts in the small (<$10M) and mid-size plan ($10M to $50M) segments, though the report notes that they are gradually moving up market to large ($50M to $250M) and even mega plans (>$250M). The $640 billion of AUM is equivalent to 32% market share of small and mid-size DC plans, and with each new acquisition or affiliation deal, aggregators’ market share and influence on plan menus grow. Sway believes aggregators will control $1 trillion or more in DC assets in the next five years.
Looking ahead, Sway Research expects DCIOs to focus even more efforts on the aggregators, which can deliver assets in return, but will also likely increase their demands, and thus the costs of servicing them. As alluded to earlier, leading recordkeepers are also gaining market share and asking for more from DCIOs.
DCIO Trends
Sway further estimates that DCIO assets will total $4.1 trillion at the end of 2018, up from $3.8 trillion a year prior. At year-end, DCIO assets will make up approximately 50% of assets in the DC market versus 40% share for proprietary assets (i.e., those managed by an affiliate of the plan administrator), with the remaining 10% invested in company stock and via brokerage and mutual fund windows.
However, positive net sales remain elusive for many asset managers that possess an established DCIO presence. According to the report, the managers with positive DCIO net sales today tend to have DCIO asset bases exceeding $100 billion, thanks to a strong brand in passive management and/or target-date, or DCIO asset bases under $10 billion, as these firms lack DCIO assets in categories that are increasingly shifting from active to passive management.
The research also finds many asset managers fighting to maintain positive net inflows of DCIO assets in 2018. The retail DCIO market (i.e., small and mid-size plans sold via advisors and mid-tier consultants) is in a period of transition as the traditional wholesale model remains vital to sales, though new groups are growing in influence, including third-party fiduciaries, distributor 3(38) modelers and investment scorecard providers – and they also need service and support.
Passive ‘Tense’?
The report notes that while established managers are still generating compelling gross DCIO sales, the steady shift of assets from active to passive management in core U.S. equity categories, such as large cap blend, and the explosive rise of target-date solutions, which are driven by a combination of auto-enrollment, auto-escalation and plan re-enrollments, often lead to more DCIO assets flowing out than coming in. Indeed, according to the report, more than half of the managers surveyed for this research report experienced net redemptions from their DCIO units in 2017 and the first half of 2018. More than two-thirds of the firms in net redemptions were mid-size DCIOs, with DCIO assets between $10 billion and $100 billion.
The situation was reversed for those managers at the upper and lower ends of the DCIO asset spectrum, as only about a third of these firms experienced net outflows.
Additional information is available in Sway Research’s “The State of DCIO Distribution: 2019—Key Benchmarks, Developing Trends, Winners and Outlook,” which is based on surveys and interviews of DCIO sales leaders, DC plan intermediaries, and executives of aggregator firms. This year's report is based on interviews with DCIO executives, aggregator leadership and plan intermediaries, as well as surveys of DCIO sales leaders from 28 leading asset management firms with nearly $1.4 trillion of DCIO AUM, executives from six aggregators with $200 billion of DC AUM, and 198 advisory practices with more than $160 billion of DC AUM. Surveys and interviews were conducted in the spring and summer of 2018.
