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Monday, October 03, 2011

How to Gather Defined Contribution Assets
Guest Column by: Fred Barstein

The defined contribution (DC) market has become one of the most important ways for investment managers to gather assets. Looking at some of the top money management firms, many like Fidelity, American Funds, Vanguard and BlackRock have deep ties to the DC market. Because DC assets are sticky and relatively non-cyclical, the DC market can be a hedge when individual investors go to ground –- participants in DC plans rarely stop contributing to their 401(k) plans even in very scary markets, though they may shift to safer investments.

While navigating the DC market to be really successful takes real skill, an investment only (DC I-O) provider, meaning those that do not own a recordkeeper, must first get placement with the top recordkeeping platforms. There are three keys to getting placement:

Fund metrics:
  • Top quartile performance within peer group or 4/5 Morningstar rating
  • three-year track record
  • Right wrapper –- usually 1940 Act funds but collective trusts are popular, especially starting with the +$100 million market
  • Price is lower than 50 percent of peer group and
  • Unique and compelling story

    Revenue Share -- Recordkeepers require revenue share to offset the cost of servicing the plan. While some asset managers that are very popular and in demand pay very little or nothing, like Vanguard, most firms are more than willing to share the cost of servicing a DC plan with recordkeepers. The average cost varies by recordkeeper, which tier a fund is on with the recordkeeper’s menu, and the size of plan. When pricing a plan, the recordkeeper calculates how much revenue sharing they can expect depending on the funds offered so they are more likely to recommend funds that pay well so they are able to charge the plan sponsors less out of pocket fees while generating maximal revenue. Compensation for recordkeeper wholesalers, who are very influential in the process, may also vary by the amount of revenue sharing.

    Advisor Demand – Currently, recordkeepers are being very selective about adding new funds for a variety of reasons. While there was a rush to open up menus five years ago caused by market demand, that need has been met and recordkeepers are loath to switch out or add funds without good reason. In addition, screening and vetting new funds takes human resources which recordkeepers have less of since the market crash. If the funds meet the right metrics and are willing to pay the revenue sharing, advisor demand is the best way to get on a platform. When advisors are telling their wholesalers and the home office that they must have a fund or else they will use another recordkeeper, there is not greater impetus to add a fund.

    Though there are many nuances to rising to the top of the DC market, everything starts, and unfortunately can end, with the right placement on the right platforms. Though the DC market is huge, it is still ruled by relationships with 20 providers controlling 80% of the assets. Hiring someone with knowledge and relationships will save time, money and the almost certain failure when outsiders stumble into the DC market trying to unseat well entrenched and well liked competitors. 


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