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DCIOs on Firmer Ground Heading into 2022

Service Providers

Coming out of a difficult 2020, an improved net sales environment and appreciating stock prices are better positioning DCIO sales and marketing units heading into 2022, according to an annual study of the DCIO market.  

Sway Research’s The State of DCIO Distribution: 2022 reveals an average DCIO AUM rise of 30% per firm over the 12 months leading up to June 30, assisted, in part, by a gain of 10% in just the first half of 2021. 

Not all the rise is the result of increasing stock prices, however, as two-thirds of managers in the survey captured positive net sales during the first half of this year—a clear improvement over full-year 2020, when 7 in 10 managers experienced net redemptions from DCIO assets. 

As such, this run of asset growth and improved net sales has the DCIO market projected to reach $6 trillion of assets by year-end 2021 and nearly $8 trillion by the end of 2025. Sway estimates DCIO assets will reach 60% of the total DC market at year-end 2025, up from nearly 57% this year. 

The findings are based on surveys and interviews conducted in the summer of 2021 of DCIO sales leaders at 21 asset management firms with $1.8 trillion of DCIO AUM and 200 DC plan-focused advisors with more than $130 billion of DC AUM.

CIT Usage Still Rising

Fueled by demand for lower-cost vehicles, Sway further estimates that DCIO assets invested in CITs will surpass $2 trillion of AUM during 2021. Though mutual funds still control the bulk of DCIO assets—possessing 39% market share to 34% for CITs—the research finds that there has been a significant shift in market share.  

Consider that at year-end 2018, mutual funds controlled approximately 45% of DCIO assets to just 28% for CITs. If CIT usage continues to surge, Sway expects that these products will overtake mutual funds in DCIO asset share by the end of 2025. 

The firm observes that most of the growth in CIT usage is coming in large and mega DC plans—those with more than $50 million of assets—while the small- and mid-size plan market, where the survey is focused, remains more concentrated in mutual fund vehicles. 

That said, CITs are seeing increased use among advisors of small- and mid-size plans, where roughly one in three plans served by these intermediaries features CITs, not including Stable Value options. As in the upper end of the DC market, usage in smaller plans is mostly driven by the need to bring down expenses, Sway notes. 

Cost Squeeze

Meanwhile, a third of specialist DC plan advisors indicated that squeezing costs out of plans to enhance plan retention and/or new sales is a “very or extremely important” business goal, while another third indicated this is “somewhat important” to their current strategy. This is not necessarily good news for DCIOs, particularly managers of active strategies, which have been losing ground to lower-cost passive strategies for some time now, the firm emphasizes. 

Additionally, two-thirds of asset managers surveyed this year indicated that they are earning less revenue on assets in CITs than mutual funds. Most say the difference is slight, while nearly one in five report that the drop in profit margin is 10% or more. 

ESG and Managed Accounts 

When asked to indicate the share of DCIO sales currently generated in products utilizing ESG factors and managed account solutions, few DCIOs believe either product type is making a major impact. 

Sway notes, however, that a lack of granularity in sales reporting data makes it difficult to track sales via these offerings, particularly sales captured via managed account solutions. 

While ESG is seeing increasing usage among plan advisors, with about three in five plan specialists now using ESG product in DC plans—up from roughly half three years ago—only about one in five of these DC plan-focused advisors surveyed use managed accounts as a QDIA.  

For those plan advisors who do use managed accounts as a QDIA, they do so in only about a quarter of the plans they serve. Despite this, Sway notes that many DCIO executives remain optimistic that the customization allowed by managed accounts will eventually win out, with these products seizing additional market share and driving greater sales in the years ahead. 

Similar optimistic views were expressed regarding the outlook for sales of ESG investments, even though 77% of DCIOs surveyed agreed with the following statement: “Media coverage of ESG in DC far outstrips the actual opportunity to capture DCIO assets via ESG product.” 

“Portfolios designed to meet ESG screens and managed account solutions will grow in importance as participants take a more active role in determining how their dollars are invested,” suggests Chris Brown, founder and principal of Sway Research. 

However, as with all enhancements to retirement plan menus, success will be achieved via a combination of compelling returns and competitive fees, he further observes. “Without attractive fees, few plan sponsors will take a chance on these plan enhancements. And building and maintaining products with these two key attributes is never as easy as it seems.”

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