Asset managers take a look at DC plan investment trends

As registered investment adviser (RIA) aggregator firms continue to acquire smaller defined contribution (DC) players, investment managers are beginning to realize their growing influence in the decision to invest in CD plans, according to a recent study. There has been a shift in distribution dynamics as many AIR firms seek to centralize their analysis and investment research.

According to Cerulli’s report “US Defined Contribution Distribution 2021: Uncovering Investment-Only Distribution Opportunities”, many aggregation firms have taken an institutional approach to their investment decision-making process, centralizing due diligence and investment analysis at the head office level. In doing so, they have removed much of the investment research and analysis responsibilities from the firm’s field advisors, allowing them to spend more time helping plan sponsors design their plan, member education and communications, and record keeping oversight.

In addition to centralizing the investment research function, some AIR aggregation firms leverage their size and investment expertise to create their own investment manager open-architecture white label investment products and solutions. investment 3(38). The report notes that 66% of managers believe aggregators have become the primary influencer in deciding investments in DC plans in the $25m to $250m segment, and that percentage rises to 68% % for the range of $250 million to $500 million.

“Managers who understand the investment decision-making process, advisor concerns and potential platform changes on the horizon will be well positioned to capture plan assets controlled by RIA aggregators,” said said senior analyst Shawn O’Brien.

CITs are primed for growth

Key DC plan decision makers, including advisors and consultants, continue to favor collective investment trusts (CITs) due, in large part, to their relatively low cost structure and flexible pricing, the Cerulli report notes. . The company recommends that target date managers strongly consider CITs for their future launches of target date series.

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. Almost all (97%) ICT vendors cite cost reduction as a very important factor when developing their ICT products. Other factors considered in the development and distribution of CITs that managers deemed very important include offering an additional vehicle to the existing investment strategy (78%), the ability to negotiate fees ( 72%), ease of distribution (47%) and speed of product development (38%).

In recent years, many CIT providers have lowered their investment minimums and, in some cases, abandoned them altogether. Cerulli’s report finds that those with low or no minimum investment are more viable investment options for smaller plans and advisors and could help promote stronger market adoption.

retirement income

Retirement income remains a priority area for asset managers and plan trustees, as industry experts note that there is no “one size fits all” retirement income product or solution. Asset managers believe that target date funds (TDFs) with a retirement income vintage are the most likely to capture the largest new flows for options in the plan (38%), followed by a dynamic product ( 22%). Dynamic Qualified Default Investment Alternatives (QDIA) that start participants in an accumulation-focused vehicle – for example, TDFs – before automatically transitioning into a managed account offer participants the benefits of personalization at the approaching their retirement years.

Just under 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-only (DCIO) asset managers (63%) say increased interest in pension plans will have a positive impact on their business. Plan sponsors looking to set up retirement tiers are likely to show an interest in helping their retired employees through the retirement phase of their lives and may be looking to offer a suite of customized, ready-to-use investments. focused on retirees.

ESG investing

A shift in political attitude has brought environmental, social and governance (ESG) investing back into the spotlight, Cerulli notes. Additional guidance from the Department of Labor (DOL) can help plan sponsors and their fiduciary partners navigate their decision-making process when implementing ESG investment products.

Cerulli found that 65% of pension advisors believe ESG products will be more widely adopted 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% over last year. Despite a proliferation of ESG investment products, DC plan trustees have historically been reluctant to offer ESG-branded investment products.

Several TDF managers indicate that they plan to integrate ESG principles into their investment process in the future. The Cerulli report notes that many CD-focused asset managers run ESG screens on their investment products and third-party sub-advisers, whether or not their investment product is ESG-branded.

On average, pension advisors expect to add an ESG investment option to the plan menu for almost a quarter (22%) of their DC plan clients. The DOL’s new, softer stance on including ESG investing in plans covered by the Employee Retirement Income Security Act (ERISA) will likely help ease barriers to adoption within the DC space. covered by ERISA, notes Cerulli.