The defined-contribution market is strong and growing, but financial advisors will have to figure out how to keep fees low in order to compete, says Hearts & Wallets in its ninth annual study, "The State of DCIO Distribution."
In the first half of 2015, 70 percent of the 30 asset managers who were surveyed recorded positive net sales, says Hearts and Wallets, a research organization for the financial services industry.
That is an improvement over the entire year of 2014, when only 54 percent of managers had positive net flows. However, 2014 was a historically bad year. Defined-contribution investment only (DCIO) sales reached a high in 2013 when 80 percent of managers had net sales gains. DCIO plans, which account for 47 percent of the DC market, are plans managed by companies not affiliated with the recordkeeper or administrator of the plan.
The DCIO market will grow from $3 trillion, or 47 percent of the DC market, today to $4.1 trillion, or 51 percent, in 2020, Hearts and Wallets predicts.
“There remains a great opportunity to manage the workplace savings of millions of Americans via a dedicated DCIO sales and marketing effort,” says Chris J. Brown, Hearts & Wallets partner and co-founder. “Today the stakes are higher, product requirements stricter, and sales more difficult to earn.”
However, the demand to cut expenses is driving business away from actively managed portfolios and into passively managed ones and promises to play an even greater role in future product selection, says Hearts and Wallets. DC plan administrators say they favor replacing actively managed domestic equity offerings with passive ones in the future.
“To really compete in the DCIO market, portfolio fees must be kept at or below median simply to make it past initial screens,” Brown says. “And that is only the price of entry” into the market.