The DC market is strong and growing on its surface, with positive net sales for the majority of firms surveyed, but considerable turmoil lurking just underneath, according to Hearts & Wallets’ ninth “The State of DCIO Distribution” study.
In the first half of 2015, 70% of the 30 asset managers surveyed recorded positive net sales. This is a marked improvement over full-year 2014, a historically bad year, when only about half (54%) of managers had positive net flows. That said, the report notes that Defined Contribution Investment-Only (DCIO) sales improvements have not reached levels seen prior to 2013, when 80% or more of managers regularly produced net sales “in the black.”
However, the fundamentals underlying DCIO growth remain solid, and Hearts & Wallets projects the DCIO market will grow from $3 trillion (47% of the DC market) today to $4.1 trillion (51%) in 2020.
Mounting Challenges
Asset managers competing in the $3 trillion DCIO market face mounting challenges from the growing role of target-date products and, most importantly, intense and growing pressure on portfolio expenses, according to the report. Hearts & Wallets says that this demand to cut expenses is driving business away from actively managed portfolios and into passively managed ones, and promises to play an even greater role in future product selection.
Asked about their plans to include a range of asset classes in DC plan investment menus in the months ahead, leading plan intermediaries (who were also surveyed) favor replacing actively managed domestic equity offerings with passive ones. For example, one-third of mid-tier consultants surveyed plan to increase DC plan placements of passively managed large cap U.S. stock funds, versus just 14% who plan to increase placements of similar actively managed offerings. More than three out of five asset managers say downward pressure on management fees has negatively impacted DCIO sales at their firms in the past year, while fewer than 1 in 10 say the impact was positive.
How Low is Low?
Asked to define low expenses, nearly half of retirement advisors surveyed, who this year support an average of 33 DC plans with nearly $60 million of assets, said an expense ratio in the lowest quartile for its category, while another one in five said the lowest 10%. This suggests that only passive products will suffice for these advisors, according to the researchers. In fact, low expenses are also crucial for success in target-date offerings. Asked to rank more than a dozen attributes in terms of importance when selecting a target-date option for a plan menu, low expenses was among the top three among both retirement advisors and mid-tier consultant.
Hearts & Wallets’ mid-tier consultant survey respondents manage more than 100 plans and $1 billion of DC assets on average.
