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Wednesday, May 19, 2010

Can Goldman's Newest 401k Strategy Work?

News summary by MFWire's editors

Goldman Sachs is shifting course in its newest attempt to win investment-only mandates in the defined contribution space. Bloomberg Business Week details the Wall Street bank's attempt to grow its share in the 401(k) space in a feature article in this week's magazine. The article is based primarily on an interview with Bill McDermott, a Fidelity veteran who joined Goldman from AXA last February.

"We want to be a major player," McDermott, a Goldman managing director and head of its defined contribution business, tells the magazine. As of the end of March, Goldman claimed 401(k) plan assets of $17.5 billion as of March 31. That compares to roughly $350 billion in 401(k) AUM at market leader Fidelity Investments.

Meanwhile, Goldman Sachs Asset Management has some $840 billion in total AUM, meaning that it will need to aim high to make 401(k)'s a significant share of its business.

McDermott explained in the interview that alternative asset funds and target-date funds that provide guaranteed income will be at the heart of Goldman's latest push. He told the magazine that Goldman is already working on developing target-date funds that include a guaranteed income option in retirement and that he expects to grow the current Goldman DC I-O team to 30 people from 20 today.

“We understand risk and we understand asset allocation," said McDermott, who joined the firm in February to strengthen its retirement-plan products and marketing. "We’re looking to leverage that for the 401(k) market."

Goldman's biggest challenge, though, is its lack of a proprietary recordkeeping arm through which it can guaranty placement of its funds. Nearly all of the major recordkeepers that are also asset managers have been resistant to level the playing field with other asset managers for core plan options such as target date funds. That means that the biggest asset flows are unavailable to third-party asset managers.

That has left third-party asset management (the DC-IO) players to work their way into plans from the edges, either by offering non-core specialty funds (such as international offerings) or "hot" funds with a brand name and current demand from plan participants. Some managers are also attempting to win mandates as subadvisors within target-date and asset allocation funds used as core options, but those efforts have been mostly slow going.

Goldman first entered into the 401(k) market more than a decade ago through an alliance with ADP Retirement. Though Goldman's funds are still available through that platform, ADP has significantly expanded the number of partners it works with, limiting the potential flow of assets for Goldman through its platform.

In 2006, the firm tapped McKinsey to help it develop a strategy to significantly grow its DC-IO business. That led to the hiring of Doug Manchester, a Fidelity retirement veteran and former CEO of Emplanet (a dotcom era recordkeeper) to spearhead the push (see The 401kWire, March 28, 2007). Under Manchester, Goldman Asset Management rolled out its initial six target-date funds for the 401(k) market that fall (see The 401kWire, September 10, 2007).

Goldman pivoted again at the end of 2008 when Scott Kilgallen took over the bank's defined contribution business following Manchaster's departure earlier that year. Kilgallen's widened the bank's focus to the now hot advisor-sold market. Kilgallen left Goldman in mid-April.

Those efforts have paid off to an extent. San Diego-based BrightScope, a data gatherer specializing in the retirement market, told Business Week that Goldman has won spots in the investment lineups at Intel Corp., Sun Microsystems Inc., and Sysco Corp.

BrightScope also found that 401(k) plan sponsors most often offer the Goldman Sachs Mid Cap Value Fund and Goldman Sachs Small Cap Value Fund to their employees. Those funds suggest that Goldman's focus on advisors has also won some business.

Yet Goldman is with the crowd in making that shift. Asset managers started to focus on retirement advisors during the past five years as they discovered that the advisors provide leverage to force their inclusion in recordkeeper lineups in the smaller plan market.

The article also cites two of the 401kWire's Most Influential Retirement Advisors -- Bud Pernoll of Santa Monica, California-based Bay Mutual Financial LLC and Steven Dimitriou, managing partner of Mayflower Advisors LLC.

Pernoll suggests that Goldman's new alternatives strategy may resonate, saying that: "You’re starting to see plan sponsors look outside the traditional asset classes." He also told the magazine that he has added Goldman's Satellite Strategies Portfolio to some of his client's plans.

Dimitriou also had positive things to say about the alternatives strategy, noting that Goldman "is ahead of the curve right now, so they see an opportunity to dominate that niche."

He warned, though, that "As soon as these funds start gaining traction, they’re going to get copy-catted."

Copy-catting is a problem that Goldman will face as it goes head-to-head with recordkeepers that also manage assets. For confirmation, it need only look at the experience of BlackRock's SponsorMatch product. Those asset allocation funds were developed by Barclays prior to its sale to BlackRock. Barclays' plan was to manage the matching portion of 401(k) plans (the sponsor's own assets). However, it failed to win over any plan sponsors to the product so far. Sources in the industry have told the MFWire.com that one issue was incumbent recordkeepers offering to recreate the product for clients that were interested.

If Goldman makes it over those plebeian marketplace hurdles, it faces one more; the April 16 SEC allegations that its mortgage arm mislead investors on CDO investments.

While the asset management arm is an unrelated part of the business, 401(k) plan sponsors are a very slow-moving and cautious herd. That is no surprise as they act as fiduciaries for their workers' life savings. Not only is Goldman asking them to ignore the current news headlines, it is also asking them to adopt new strategies in the use of alternatives and retirement income. It may take a lot of time to see how the effort turns out. 

Edited by: Sean Hanna, Editor in Chief

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