As registered investment adviser (RIA) aggregator firms
continue to acquire smaller players in the defined contribution (DC) space,
investment managers are starting to take notice of their growing influence in
deciding DC plan investments, a recent study suggests. There has been a shift
in distribution dynamics as many RIA firms look to centralize their investment
analysis and research.
According to Cerulli’s “U.S. Defined Contribution
Distribution 2021: Uncovering Investment-Only Distribution Opportunities”
report, many aggregator firms have taken an institutional approach to their
investment decisionmaking process, centralizing the due diligence and
investment analysis at the home-office level. By doing so, they have taken much
of the investment research and analysis responsibilities out of the hands of
the firm’s field advisers, enabling them to spend more time helping plan
sponsors with their plan design, participant education and communications, and
recordkeeper oversight.
In addition to centralizing the investment research
function, some RIA aggregator firms are leveraging their scale and investment
expertise to create their own 3(38) investment manager open-architecture,
white-label investment products and solutions. The report notes that 66% of
managers believe aggregators have become a primary influencer in deciding DC
plan investments in the $25 million to $250 million segment, and that rises to
68% for the $250 million to $500 million range.
“Managers that understand the investment decisionmaking
process, adviser concerns and potential platform changes on the horizon will be
well-poised to capture plan assets controlled by RIA aggregators,” says senior
analyst Shawn O’Brien.
CITs Poised for Growth
Key DC plan decisionmakers, including advisers and
consultants, continue to favor collective investment trusts (CITs) due, in
large part, to their relatively low-cost structure and pricing flexibly, the
Cerulli report notes. The firm recommends that target-date managers strongly
consider CITs for their future target-date series launches.
The vast majority (92%) of managers currently offer a
target-date series in a CIT, and 2021 has seen the use of CITs grow in place of
other, traditional funds as the retirement vehicle of choice. Nearly all (97%)
CIT providers cite lower costs as a very important factor when developing their
CIT products. Other factors considered in development and distribution of CITs
that managers found very important include having an additional vehicle
offering for the existing investment strategy (78%), the ability to negotiate
fees (72%), the ease of distribution (47%) and the speed of product development
(38%).
In recent years, many CIT providers have lowered their
investment minimums and, in certain cases, waived them altogether. Cerulli’s
report finds that those with low or no investment minimums are more tenable
investment options for smaller plans and advisers and could help promote
stronger adoption down market.
Retirement Income
Retirement income remains a prime area of focus for asset
managers and plan fiduciaries, as industry experts note there is no
“one-size-fits-all” retirement income product or solution. Asset managers
believe target-date funds (TDFs) with a retirement income vintage are most
likely to capture the greatest new flows for in-plan options (38%), followed by
a dynamic product (22%). Dynamic qualified default investment alternatives
(QDIAs) that start participants off in an accumulation-focused vehicle—e.g.,
TDFs—before automatically transitioning them into a managed account offer
participants the benefits of personalization as they approach their retirement
years.
Slightly less than a quarter (21%) of target-date managers
offer a target-date series with a guaranteed income component. Providers note
that some plan sponsors are beginning to adopt TDFs with a guaranteed income
component, but adoption is still far from widespread, Cerulli says.
Most defined contribution investment-only (DCIO) asset
managers (63%) indicate that greater interest in retirement tiers will have a
positive impact on their business. Plan sponsors looking to implement
retirement tiers are likely to exhibit an interest in helping their retired
employees navigate the retirement phase of their lives and may look to offer a
suite of customized and off-the-shelf retiree-focused investments.
ESG Investing
A shift in political attitude has placed environmental,
social and governance (ESG) investing back in the spotlight, Cerulli notes.
Further guidance from the Department of Labor (DOL) may help plan sponsors and
their fiduciary partners navigate their decisionmaking process as they
implement ESG investment products.
Cerulli found that 65% of retirement specialist advisers
believe ESG products will gain broader adoption in the DC market in the coming
years, and 67% of asset managers believe interest in ESG investing will have a
positive impact on their DCIO business, up 20% from last year. Despite a
proliferation of ESG investment products, DC plan fiduciaries have historically
been hesitant to offer ESG-branded investment products.
Several TDF managers indicate they plan to incorporate ESG
principles into their investment process moving forward. The Cerulli report
notes that many DC-focused asset managers run ESG screens on their investment
products and third-party subadvisers regardless of whether their investment
product is ESG-branded.
Retirement specialist advisers, on average, expect to add an
ESG investment option to the plan menu for nearly one-quarter (22%) of their DC
plan clients. The new, softer DOL stance on including ESG investments in plans
covered by the Employee Retirement Income Security Act (ERISA) will likely help
ease barriers to adoption within the ERISA-covered DC space, Cerulli notes.
Click here for the
original article.