After a year of solid gains, price declines and turbulence in bond and equity markets took a heavy toll on defined contribution investment-only (DCIO) assets in the first half of 2022, according to an annual study of the DCIO market.
Now in its 16th year, Sway Research’s The State of DCIO Distribution: 2023—Key Benchmarks, Developing Trends, Winners and Outlook, which is based on surveys and interviews of DCIO sales leaders and DC plan advisors, reveals that the 21 managers to complete the firm’s annual survey experienced an average asset drop of 17% in the first six months of 2022.
“The bread and butter of most DCIO efforts are equity funds, so the average manager is particularly hard hit when stock prices are falling, while the overall market fares better as assets shift into conservative investments, such as money market and stable value funds,” the firm notes in its release.
Still, despite the 17% first-half dip for the average manager, Sway Research is projecting a decline for the overall DCIO market of 14% this year—meaning it will finish the year at $5.3 trillion of assets, down from $6.2 trillion at the end of 2021. That said, the situation could worsen if September’s stock market volatility continues throughout the remainder of the year, the firm adds.
Not only are DCIO assets under pressure—which negatively impacts asset management revenues—but two-thirds of DCIOs also experienced net redemptions during the first half of 2022. The only segment that produced average net inflows is a collection of large DCIOs with leading target-date series.
Target Date Buffer
Meanwhile, 10 of the 21 firms in Sway’s survey produced 15% or more of gross DCIO sales from target-date portfolios, with the average firm in this segment producing 29% of gross DCIO sales from target-dates.
Half of these 10 firms experienced DCIO net redemptions during the first half of 2022, which the firm notes does not sound great, until you compare it to 9 of the 11 firms lacking target-dates, or substantial sales from them, also experiencing net outflows.
What’s more, the 10 DCIOs earning a large portion of sales from target-dates are on track to reach their 2022 gross sales goals, producing average first-half gross sales equivalent to 54% of the average goal they set for 2022. The segment of DCIOs lacking target-date flows has some catching up to do, as their first-half sales efforts produced an average of just 44% of their average 2022 goal. These firms experienced average net outflows of $600 million during the first half of 2022, while those with substantial target-date sales averaged $6.1 billion of net inflows, Sway further reports.
Lukewarm Advisor Interest in Income Options
According to the firm, a key challenge facing DCIOs and the DC platforms through which they distribute investments is to provide solutions for steady (and in some cases guaranteed) income to participants who wish to leave their assets in their employer’s DC plan following retirement.
Eight DCIOs with target-date businesses surveyed by Sway are offering—or plan to offer—target-dates with guaranteed income via combinations with insurance products, while five intend to offer target-dates with stable, but non-guaranteed, income features (some plan to offer both).
Sway observes, however, that promotions for such offerings to advisors who serve DC plans will face several obstacles. Only one of five of the roughly 200 plan advisors surveyed by Sway for this research perceive target-dates with guaranteed income as being “sensible” for a majority of the DC plans they serve. More than 7 in 10 believe there are better solutions for in-plan income than TDFs with income components. According to the research, one of the biggest reasons given for the tepid interest is cost. More than half of advisors surveyed believe target-dates with guaranteed income are too expensive to be an effective solution.
When asked to rate their interest in an array of in-plan income offerings, none of the insurance-based options—including annuities as well as target-dates with guaranteed income streams—generated substantial interest among most plan advisors. In fact, the most popular choice was a simple systematic withdrawal plan.
Passive Management Expectations
In looking to cut expenses again, high fees were the No. 2 reason given by plan advisors for replacing investments in DC plans. When asked what portfolios they’ve replaced in the past year and why, plan advisors mentioned high fees in 25% of instances, while poor performance was the cause 52% of the time.
As to 2023 priorities, Sway found that 70% of DCIOs surveyed say lowering fees/expenses on key products is a top-five priority, including six for which it is their No. 1 priority. More than half of managers that prioritize fee cuts also prioritize the launch of new collective investment trusts (CITs).
This year, less than half (49%) of gross DCIO sales came from mutual funds at the average Tier 1A manager—the largest of Sway’s DCIO segments—as CITs (26%) and institutional separate accounts (24%) made up most of the rest. Sway notes that CIT usage continues to rise even among mid- and small-plan advisors, as roughly three-quarters of those surveyed by the firm this year use CITs in some of the DC plans they serve.
Sway projects CITs will exceed 34% of DCIO AUM this year, up 0.6% year-over-year. Meanwhile, mutual funds still hold 39% of DCIO AUM, but the gap is closing fast. Sway estimates that passive DCIO assets grew at 16% annually over the past five years, while active AUM grew at about half that rate (8.1%).
The findings are based on surveys and interviews conducted in the summer of 2022 among DCIO sales leaders from 21 asset management firms with $3 trillion of DCIO AUM, and retirement plan-focused intermediaries from 202 advisory practices with more than $125 billion of DC AUM.
