As defined contribution (DC) plans have evolved, so have the tools and services that investment managers offer plan advisers in the form of defined contribution investment-only (DCIO) products.

“The landscape has definitely changed in terms of the opportunities,” says Toni Brown, San Francisco-based senior vice president, retirement strategy, at Capital Group, home of American Funds. “As a result, DCIO providers are offering services and tools that they never offered before.” For example, target-date fund (TDF) evaluation tools have become important, she says, to help advisers report to plan sponsor clients on the status of their default investments. “And there’s more focus now on: How do you measure success for your plan? And what do you need to do for your plan to be successful?”

The current market and economic volatility have swelled plan adviser interest in T. Rowe Price’s value-added services, says Michael Doshier, senior defined contribution adviser strategist in the company’s retirement – U.S. intermediaries business, in Baltimore. “The volume of the meetings we’re having [when the field team is engaging a value-add resource or expert] is up 62% over the past couple of months,” he said in mid-May. “There are many people with anxiety out there, and advisers and sponsors need help just like other people.”

Open Architecture and Distribution, in Flux

DCIOs’ share of the defined contribution plan market has been increasing gradually for years, reaching 51%—or $4.4 trillion in assets—by the end of last year, says Chris Brown, founder and principal of Sway Research LLC, a DCIO distribution research and consulting company in Newton, New Hampshire. The trend has been toward open architecture for about two decades, he says, with recordkeepers’ proprietary funds down to 39% market share by year-end 2019.

But the overall trends now are rough for DCIOs, says Brown, and he points to two major developments. “Everything I’ve been told suggests that two-thirds to three-quarters of new contribution flows are going into QDIAs,” and recordkeepers’ target-date fund offerings often are not truly open architecture, he says. A recordkeeper may have DCIOs’ TDFs on its platform but require sponsors to utilize its proprietary target-date funds to get the lowest fee on recordkeeping services—the recordkeeper will miss out on the TDF investment management fees if those assets go into another manager’s funds. “The [second] challenge is that, with so much focus on fees, such a large percentage of assets are flowing to lower-cost, passive investments,” he says.

As the advisory business consolidation has happened, Brown says, larger specialist advisers have also begun flexing their muscles with DCIOs.

According to Brown, there are about 60 asset managers with dedicated DCIO sales and marketing staff; out of that 60, BlackRock, Vanguard and State Street Global Advisors (SSGA) manage roughly 90% or more of passive DCIO assets under management (AUM). “Passive management is built on scale, which allows managers to lower their fees: The firm with the lowest fees typically wins the battle for passive assets. The advantage held by these three firms is practically insurmountable.”

The dynamics of distribution have also changed for DCIOs, as both recordkeepers and advisory firms consolidate, he says.

The large recordkeepers, now with major market share, “are flexing their muscles with DCIOs more than ever before, and they’re also cutting back on the funds on their platform,” Brown says. As revenue sharing diminishes, it has become common for a recordkeeper to offer a DCIO different tiers of access to its platform, with each tier carrying a different price tag. Paying more to be in a higher tier could mean a DCIO’s funds become eligible for inclusion in key products such as custom target-date funds and a preapproved fund list for 3(38) fiduciary investment management. “This is very much ‘inside baseball’ stuff,” he adds. “It’s one of those things, like revenue-sharing, that is known but not discussed much in public.

“Instead of taking the money out of the investment-management fees with revenue sharing, recordkeepers are essentially asking DCIOs to cut a check to cover those fees,” Brown says. “So the DCIOs are still paying. But, for the most part, asset managers like the move toward zero revenue share. That way, they know what it’s going to cost them each year to get access to a recordkeeper’s platform, as opposed to it varying, based on assets.”

Has the move toward specialist advisers and aggregators changed how DCIOs work with advisers? “My take is that the qualifications for these [DCIO team] roles have been elevated,” Brown says. “Aside from the research teams, who are data-driven, there’s little room for staff whose expertise lies mostly in product.” What this means, he says, is that sales staff must understand the advisory business and the marketplace in the territory they cover: They must be business consultants and be able to offer insight into what other advisers in that area are doing to improve their businesses, plus know which DC plans in the area might be soliciting requests for proposals (RFPs).

“DCIO leadership and key account staff must be attuned to the enterprise goals and needs of the advisory firm at the home-office level,” he continues. “They need to understand what senior management is planning and look for ways to support this—even if there’s no immediate product sales opportunity. They must be good partners at all levels.”

As the advisory business consolidation has happened, Brown says, larger specialist advisers have also begun flexing their muscles with DCIOs. “They want some value-added services, but what they really want is access to lower-priced [investment] products,” he says. “The aggregators are saying to DCIOs, ‘Across our plans, we have got several billion dollars invested in this product, and we want to use our scale as a retirement specialist. We don’t want to continue to use the R6 [revenue-free] shares everyone else has; we want a lower-cost product than our competitors’. We want you to create a collective investment trust [CIT] for us that has the same investments, but for 5 or 10 basis points [bps] less.’”

Not surprisingly, DCIOs have amped up their value-added services for plan advisers, with increased focus on substantive enhancements and away from sales pitches about product, Brown says. “The more specialized the business gets, the less interest plan advisers have in talking about products. But they will talk to someone who can talk about something substantive to help that adviser run his business.”

That does not mean the DCIOs are ignoring the retail investor market. “What’s happening is that some of the largest specialist advisory firms—such as CAPTRUST, SageView and NFP—are seeking to broaden their asset base via a greater focus on individual wealth,” Brown says. “This is being done as a means to elevate firm valuations, as a considerable number of senior managers[—i.e., partners—]are approaching retirement age.” DCIOs increasingly help these specialist advisory firms build their individual wealth businesses to support them at an enterprise level and thus also strengthen their DCIO relationships, he explains.

Help With Competitive Positioning and Service Differentiation

Among what may be considered traditional offerings, such as market insights, research and evaluation tools, DCIOs can help advisers differentiate their services and work with clients in this unusual current environment.

“As the pandemic situation has helped to highlight, life moves quickly, and client goals and needs can change just as rapidly,” says Doshier. To help, he says, T. Rowe Price is equipping its adviser partners with guidance on topics such as how to effectively connect with prospects and clients virtually and is supplying content that aims to engage sponsors and participants.

In Vanguard’s work with plan advisers, it “encourages advisers to differentiate their value proposition by focusing on controllable outcomes and taking a holistic approach, rather than anchoring to portfolio and manager outperformance,” says James Martielli, head of DC advisory services at the company, in Valley Forge, Pennsylvania. He says Vanguard can consult with advisers on related issues including grounding their practice in applicable fiduciary duties and best practices, as well as educating clients, creating a comprehensive investment policy statement (IPS) for a client, and ensuring that the client gets the appropriate plan design elements.

As for Capital Group, “We are always developing tools to deliver leverage and scale into an adviser’s business,” says Craig Duglin, senior product manager at the company, in Los Angeles. Business-building strategies, prospecting tactics, client and prospect conversation frameworks, and a value-proposition-statement template are among its resources for advisers.

The firm’s target-date fund evaluation tool, ProView, has been particularly effective as a differentiator, Duglin says. “Advisers have needed a more efficient way to conduct and document target-date due diligence for clients and prospects. This tool enables them to compare and contrast the target-date universe in a framework inspired by DOL [Department of Labor] fiduciary tips [and] using Morningstar data to tease out important differences to more effectively align the right series for their diverse client base.”

Art by Melinda Beck