Larry Fink's top chiefs have put together a plan to go after DC plans on all fronts -- from mutual funds to separate accounts and collective trusts. If that doesn't work for you, you can always add them as a subadvisor; just don't ask them to do recordkeeping.

BlackRock Makes DC Push Managing Directors Edward Ng, Doug DuMond with Vice Chair Barbara Novick Photo Credit: InvestmentWires Staff

BlackRock will formally roll out its lifecycle portfolios targeted at the defined contribution plan market Monday morning. The move is part of an effort by the New York City-based asset management giant to increase its market share in the 401(k) plan space. BlackRock, which has no proprietary recordkeeping product of its own, will both take the funds directly to large plan sponsors and distribute the funds through recordkeepers and financial advisors. With more than $1 trillion in assets under management, BlackRock already has significant relationships in the Fortune 500 market and is making its 401(k) push a high priority.

"It is a very, very high priority," said Barbara Novick, vice chairman of BlackRock, adding that last year a key part of her annual presentation to BlackRock's board of directors was on the need to address the opportunity in the DC market. That discussion came even as the board was working to integrate the purchase of Merrill Lynch Investment Managers (MLIM), a deal that closed last September.

"We can be the independent provider of choice," explained Novick. "We are not in the recordkeeping business and are not going into the recordkeeping business."

Novick sees the passage of the Pension Protection Act (PPA) last year as opening the door to BlackRock and other providers that can deliver core asset allocation funds for use as qualified default investment alternatives (QDIAs) in defined contribution plans.

"The most exciting things to look at are the T. Rowe Price press releases for the past two quarters. In them, they [T. Rowe executives] specifically cite asset allocation funds for the reasons for their growth."

She said that the firm is remaining agnostic in the debate over whether target risk or target maturity models are the better solution, and will offer both target risk and target maturity funds to clients.

"I would love to see people offer both in their platforms. Default people into a target date, but let them change to a target risk fund if they want," she said.

BlackRock already quietly launched its target-risk funds in January. Those funds are already pulling in more than $1.5 million in new assets a day said managing director Doug DuMond. Those funds now have $75 million in assets.

Novick added that recordkeepers without their own asset allocations funds will not be willing to turn to current market leaders in the space such as Fidelity, T. Rowe Price and Vanguard, that are also their competitors on the recordkeeping front. She also pointed out that BlackRock will have an edge over Barclays Global Investors (BGI), because BlackRock will be able to deliver active management products to plan sponsors. BGI is widely known for its competency as an indexer.

BlackRock executives have already approached the leading three dozen 401(k) plan recordkeepers as part of its effort to gain distribution through those platforms. That effort is headed by DuMond, who signed on with BlackRock last fall after helping the asset manager develop its strategy last summer as a consultant. Before working with BlackRock, DuMond gained experience with building 401(k) distribution for asset management products as the head of IXIS Distributors' efforts.

Novick pointed out that BlackRock already has relationships with 272 of the Global Fortune 500. In the wake of BlackRock's takeover of MLIM and its earlier pick up of State Street Research from MetLife, BlackRock claims to manage $69 billion of DC assets under management. That includes four of the top 100 equity funds and four of the leading 100 fixed income funds in the DC market share rankings published by Pensions & Investments, she added.

Novick said that the products will be available as mutual funds, collective trusts and separate accounts, though most plan sponsors may want to stick to the mutual fund products.

DuMond added that about a dozen of the strategies are already available as collective trusts. Those initial collective trusts cover the basis equity indexes, core equity strategies and four active equity strategies as well as a fixed income strategy, said DuMond. He believes that the economics of those trusts works best for plans with more than $500 million in assets.

Challenges

One hurdle that BlackRock will face is convincing plan sponsors to "unbundle" their investment management decision from their choice of recordkeeping platform. DuMond acknowledges that adding non-proprietary QDIAs into a 401(k) plan has the potential to upset the existing economics of plans. The majority of the national 401(k) platform providers use revenues from proprietary investment options to offset some or all of the costs of recordkeeping. The smaller the plan, the more likely the recordkeeper is to rely on proprietary funds or revenue sharing from platform partners to cover these costs. Typically, recordkeepers will require a portion of the plan's funds -- often a quarter or more -- to be invested in proprietary funds in order for the plan sponsor to get the lowest pricing on recordkeeping.

BlackRock will pay recordkeepers 20 to 25 basis points to cover the costs of providing participant services. That figure, though, will fall short of what the recordkeeper could earn if its own funds were used in the plan.

Still, the PPA could help BlackRock overcome this challenge; the act reminded many of the largest plan sponsors that they have a fiduciary duty to look at investment performance along with other plan design issues. DuMond points to a recent Callan Associates survey that found that 21 percent of the largest plan sponsors are seeking to add non-proprietary asset managers for their QDIAs, a decision that does unbundle the recordkeeper and asset manager decisions.

In all, more than two thirds of the sponsors responding to the Callan survey said that they are likely to add a QDIA -- good news for Novick, DuMond and the rest of BlackRock's team. Indeed, that team has another trick up its sleaves in its push to gain market share: many of the largest providers of asset allocation funds already use it as a subadvisor. Those relationships could mean that BlackRock wins share no matter which way a plan sponsor moves.

All counted, Callan found that as many as 60 percent of those plan sponsors are leaning toward target date QDIAs rather than alternatives such as managed accounts and stable value funds, and that means that BlackRock could find itself in the right place at the right time. 

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