Asset management firms that have recently set sail in defined contribution are eager to help advisors guide plan sponsors through less-navigated channels. By introducing custom target-date funds, alternative investments, exchange-traded funds and other options, they hope to leverage their investment expertise in ways that can help plan participants save more for retirement.

The timing is right, they say, given growing attention to fees; the Department of Labor’s long-awaited guidance on custom target-date funds, published last year; and employers’ growing interest in helping workers save more for retirement.

Goldman Sachs Asset Management (GSAM) entered the defined contribution market with its 2012 acquisition of Dwight Asset Management, a Vermont-based stable value asset manager. Upon acquiring Deutsche Asset and Wealth Management’s stable value business this quarter, it will have approximately $80 billion in DC assets under supervision, with more than $50 billion in stable value, says Greg R. Wilson, head of defined contribution, intermediary distribution for GSAM. “GSAM is striving to be a leading provider in the DCIO [defined contribution investment only] market, and that’s really through the delivery of innovative investment solutions,” he says. “The ultimate goal is to help produce better outcomes for plan participants.”

GSAM, which seeks to balance broader diversification with leaner menus and greater cost efficiencies, is taking a multi-pronged approach. First, it’s focusing efforts on capital preservation, which includes stable value. It’s also addressing fixed-income diversification and interest rate risk by building products to complement core fixed-income exposure and helping advisors incorporate alternative or nontraditional asset classes into DC plans.

In its recent white paper, “The Role of Alternatives in the Age of Volatility: Redefining Diversification for Defined Contribution Plan Participants,” GSAM notes that defined benefit plans, which have embraced alternative asset classes more than the DC market, have historically outperformed DC plans on average by 1% annually.

“The role of alternatives [in DC plans] is going to be critical,” says Wilson. “The activity and interest and the conversations that we’re having with advisors have increased exponentially over the past 12 months in this space.”

Late last year, GSAM hired Nadia Papagiannis, formerly the director of alternative fund research at Morningstar Inc., for the new role of director of alternative investment strategy for global third-party distribution. “She is a well-respected industry voice in the growing liquid alts market,” Wilson says, “and she is really focused on advisor education.”

As for fixed income, “We’re not advocating completely replacing a plan’s core fixed-income exposure,” he says. But he thinks it might make a lot of sense to add to a plan’s menu an unconstrained bond strategy, which gives managers more flexibility to adjust duration and adapt to market conditions such as rising interest rates.

The GS Retirement Portfolio Completion Fund (GRIPX) incorporates many nontraditional investments (including inflation-linked government bonds, global real estate investment trusts, commodities, emerging markets equity, emerging markets sovereign credit and North American high-yield corporate credit) and hedge fund replication. A packaged portfolio mitigates the potential downside risk of investing in any one of these asset classes, says Wilson, who notes that studies show plan participants do better and invest more when there are fewer options.

The GS Absolute Return Tracker Fund (GJRTX), which seeks to replicate the returns of the broader hedge fund indices to provide long-term growth of capital, is imbedded in the Retirement Portfolio Completion Fund and offered as a stand-alone product. GSAM’s other 401(k) offerings include the GS Strategic Income Fund (GSZIX), which is a nontraditional bond fund, and the GS Multi-Manager Alternatives Fund (GSMMX).

When helping advisors develop custom target-date solutions, GSAM encourages them to consider not only the participants’ age and risk profiles but also their salaries, plan participation rates, cash flows coming from the plan and whether the company also offers a DB plan.

Cost-Efficiency And Customization
Sage Advisory Services Ltd. Co., an Austin, Texas-based independent investment management firm with $10.5 billion of assets under management, created target-based products for separately managed accounts and also wanted to share its broad range of fixed-income and tactical ETF strategies with the 401(k) community. But inadequate industry technology and the costs and requirements associated with mutual funds were big barriers to entry, says Bob Smith, president and chief investment officer of Sage. So the firm recently tried another door: collective investment funds.

Also known as collective trusts, CIFs can be priced and traded daily, elected as qualified default investment alternatives (QDIAs), and put on multiple platforms. In January, Sage launched a series of style-box and target-date CIFs. “This is pure ETF, all the time,” says Smith. It’s also “easy on the eyes,” he says, since Sage typically has just six to 10 ETFs in each fund. Most of the ETFs are passive and based on indices that have track records of 10, 15 or 20 years.

Sage, which has full discretion on these assets, trades the ETFs when it thinks it’s necessary. Houston-based Hand Benefits & Trust Co., a BPAS (Benefit Plans Administrative Services Inc.) company, helped Sage establish the funds and serves as trustee and transfer agent.

David Hand, CEO of HB&T, says the fees for running a collective trust are often 30% to 40% less than for a mutual fund. A collective trust doesn’t require a prospectus or tax accounting, and it costs about $5,000 to audit, versus $100,000 for a mutual fund, he says.

Hand, who says approximately $3 trillion of the retirement plan market’s total $16 trillion in assets is in collective trusts, expects to see half of retirement plan assets there within the next 10 years as advisors seek to add value. “I don’t see anything stopping it,” he says. “Everything is about fees and being a fiduciary to a plan—and a mutual fund is not a fiduciary to a plan.”

Global asset manager Russell Investments, which launched its first target-date funds in 2004, expanded its DC team last year and recently added Adaptive Retirement Accounts (ARAs). It’s taking them live with a number of clients this spring. Unlike a target-date fund, which is a pooled vehicle based just on age, an ARA is an individual account that establishes a custom glide path for each participant based on his or her age, account balance, deferral rate, gender and salary.

“Target-date funds have done a solid job of improving participants’ diversification within plans, and this product builds upon their strength,” says Andrew Scherer, director of defined contribution for Russell’s U.S. advisor-sold business. “We really think it’s cutting edge and at the forefront of where the industry is going,” he says. “What we’re hearing from plan sponsors and their advisors today is that they want highly controlled, highly automated, individualized options for their plan participants.”

ARAs, which plan sponsors can select as QDIAs, don’t require participant interaction. Instead, Russell can extract individuals’ data using technology linked to plan sponsors’ record-keeping platforms. Fees are comparable to those of target-date mutual funds since they are dependent on the underlying assets. Russell also offers multi-managed asset class funds and provides a lot of thought leadership for DC plans, says Scherer.

Meanwhile, 401(k) service provider Schwab Retirement Plan Services Inc. has seen some early interest in its all-ETF 401(k) platform, the industry’s first, which it launched in February, says Steve Anderson, head of Schwab Retirement Plan Services. “Number one, it’s driving costs down to the lowest possible levels,” he says. It also provides transparency, timely trading and greater flexibility in terms of available asset classes.

The platform, part of Schwab Index Advantage, currently offers 27 asset categories in roughly 80 low-cost ETFs. “We are not using any leveraged or exotic ETFs,” he says. “It’s pretty vanilla in terms of how we’ve approached this based on the fiduciary role of the plan sponsor.”

The average operating expense ratio for the new platform is less than 10 basis points, versus 15 basis points for the index mutual fund version of Schwab Index Advantage, launched last year. Combining fund investment costs and professional management fees, workers will pay on average less than $60 per $10,000 invested with Schwab Index Advantage, says Anderson, versus $95 to $140 per $10,000 for similar professional management in a typical 401(k) plan using primarily actively managed mutual funds. “With that lower asset management fee,” he says, “it really opens the opportunity for professional advice.”

Field Observations
Ascensus, a leading provider of record-keeping and administrative services that works with approximately 44,000 defined contribution plans, mostly small or midsize plans, is seeing a big shift toward the “help-me-do-it investments,” says Mike Narkoff, SVP of sales at Ascensus. “It’s easier for average plan participants to connect the dots,” he says, noting that interest is largely being directed at target-date funds and risk-based funds.

Ascensus has also observed a broader range of institutional share class offerings. “As we add new relationships with existing asset managers,” says Narkoff, “the majority has been in the low-cost institutional bucket.”

What Ascensus is not seeing much of in the size plans it works with is custom target-date funds. “I don’t see it coming down market as fast as other things,” he says. Nor has there been much adoption of alternative investments.

Stone Street Equity LLC, a Pearl River, N.Y.-based firm managing $3 billion in retirement assets for approximately 60 plan sponsors, has been eager to try new 401(k) products. Through its affiliation with LPL Financial, it is piloting a program with BlackRock, the world’s largest asset manager, that enables it to take 3(38) responsibility and customize target-date funds for 401(k) plans, says Barbara Delaney, a principal with Stone Street.

Stone Street has been using the Goldman Sachs Strategic Income Fund (GSZIX) for about a year. “Our goal is to protect principal,” she says. “The fund can go anywhere it sees opportunity.” She thinks multi-sector bond funds can be particularly useful for plan participants.

“Fixed income is probably the most misunderstood asset class for them,” she says, noting that they don’t understand that bonds have the potential to lose money, don’t realize there are different types of bonds and don’t know how to move between fixed-income funds.

Anton Bayer, founder of Up Capital Management, a San Jose, Calif.-based firm that manages approximately $80 million in assets for 401(k) plans plus $85 million in assets for its wealth management clients, plans to look at the costs and features of the Schwab all-ETF platform. Costs have become increasingly critical as the firm has moved away from a commission-based model. It now serves as an RIA for most of its 401(k) clients.

Up Capital helps select funds and perform full cost analyses for plan sponsors, who typically hold 18 to 25 funds. Still, “Just going after expenses isn’t the answer,” Bayer says. “Our goal is to constantly deliver to employees the best fund lineup.”