Plan Sponsor Opportunity as Asset Managers Shift

In the midst of market volatility and projections of a prolonged low-return environment, asset managers are seeking new ways to reach institutional investment buyers, including defined contribution (DC) retirement plans.

New research from Casey Quirk, a practice of Deloitte Consulting LLP, suggests this trend should present tremendous opportunity for retirement plan sponsors to take advantage of new innovations. On the flip side, it will be more important than ever for plan sponsors to monitor the marketplace of investment products to ensure they are still accessing top quality offerings.

Casey Quirk projects that investment managers who do nothing to modernize their sales and service approaches could face more than $770 billion in collective outflows through 2021. However, the firm projects that those which transition their capabilities to serve the evolving preferences of institutional buyers can expect to see inflows of as much as $1.5 trillion during the same time period. This dramatic flow of capital could significantly reshape the asset management landscape retirement plans and other institutional investors operate in.

Casey Quirk suggests asset managers that haven’t traditionally sought to do business in the space will increasingly seek “new” institutional buyers such as DC plans, while significantly adapting their offerings and sales structures to better serve clients in “this saturated, competitive environment.”  

David O’Meara, a senior DC investment consultant at Willis Towers Watson, notes that as the retirement services industry shifts from the defined benefit (DB) to DC model, many asset managers are finding their products don’t exactly fit well into a DC plan sponsor’s investment menu. Product innovation can change that. O’Meara says managers will likely venture to create new vehicles like institutionally priced mutual funds or collective investment trusts (CITs).

“In the case of a CIT, the operational costs are lower and so they can operate on a more cost-effective basis which is crucial in today’s DC environment,” O’Meara says.

NEXT: Change doesn’t come easy 

Of course, this evolution won’t come easy for all asset managers—and there is a distinct chance that new players could emerge to challenge those that have traditionally been successful serving DB and DC plans.

O’Meara notes that many managers today are examining the best approaches to building target-date funds (TDFs), which continue to dominate new flows in the DC retirement planning market. Leading investment product manufacturers are also focused on serving the shift to greater use of passive investments, which coincides with a growing client focus on managing fees and increased skepticism about the long-term value of buying active management.

Considering all of this, O’Meara says sponsors can work with asset managers and adviser resources to “negotiate better fee terms or encourage managers to launch vehicles with a better fee structure from the retirement plan perspective … It’s a good opportunity for DC sponsors to revisit their managers and the fees associated with them.”

Jeff Levi, principal at Casey Quirk, tells PLANSPONSOR that overall asset managers are also responding to demographic shifts and investor preferences for different exposures like environmental, social, governance (ESG) parameters, which is becoming increasingly popular among Millennials, studies suggest. Although the conversation about building lifetime income through DC plans is still in its nascent stages, new in-plan retirement income vehicles could also act as entry points for asset managers looking to enter or improve their offerings in the DC space.

“Defined contribution has been designed as an asset accumulation system and has not really transitioned into a retirement vehicle,” O’Meara concludes. “Now, we’re starting to see retirement income solutions come to market. It’s certainly an area that we see taking hold in the coming years.”