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DCIO Assets Still Growing Strong, Reach $3.5T in 2016


NEWTON, NH, October 12, 2016 -- The tenth edition of Sway Research's annual in-depth study of DCIO distribution finds that asset managers remain committed to the growing DCIO market, despite pressure from passive management, as well as uncertainty brought on by the looming implementation of the DOL fiduciary rule. Of course, it's easier to stay committed to a market when assets are rising, and that's the case for DCIO. Sway estimates DC investment-only (DCIO) assets now total $3.5T and make up 48% of the DC market. Sway projects IO assets will grow at more than twice the rate of proprietary assets through the remainder of this decade to produce total DCIO AUM of $4.4T in 2020, at which point IO will make up 52% of DC assets.

Assets Rising, Sales Under Pressure

Based on interviews and surveys of DCIO sales leaders and specialist advisors, The State of DCIO Distribution 2017: Maintaining a Growth Trajectory in an Uncertain Market illustrates in great detail the challenges facing asset managers, as well as the ways in which these firms are adapting to changes and growing DCIO assets. Assets at the average manager increased by 5% over the 12 months ended June 30, 2016. That said, although gross sales levels in the first-half of 2016 improved relative to 2015, the average manager experienced slight net redemptions from its DCIO business of $21M, following net outflows of $304M in 2015. Sway expects the trend of asset growth outpacing net redemptions to continue, barring a steep or prolonged correction in U.S. equities.

The new report features some good news for DCIOs regarding Target-Date solutions, which have been a drag on sales for managers that lack compelling Target-Date products and/or an affiliated DC recordkeeping business. A growing percentage of managers are now benefiting from Target-Dates, as more than half of surveyed managers indicated that Target-Dates had a positive impact on DCIO sales in the past year, up from 40% of firms two years ago.

On the other hand, increased use of passively-managed portfolios within DC plans is a growing concern. Nine of 10 managers indicated that the growth of passive management has had a corrosive effect on DCIO sales. Complicating this issue is the finding that specialist DC plan advisors increasingly favor passively-managed portfolios over active ones in key asset classes, such as U.S. Large Cap Equity and Target-Date investments. In fact, index fund behemoth Vanguard is the preferred provider of Target-Date portfolios among these advisors, although active manager American Funds is still the most-preferred manager of U.S. Large Cap Equity products (Vanguard is #2).

Institutional Pricing Is Taking Hold in Plan Menus

Another shift on the product front is the rise of institutional pricing. Products with 12b-1 and sub-T/A fees are fading from DC plan investment menus, while zero revenue mutual fund shares and, to a lesser extent, collective investment trusts (CITs) are booming, as specialist plan advisors forsake commissions in favor of revenue models based on flat- and asset-based fees. The average manager generated about 30% of its first-half 2016 gross DCIO sales in zero revenue products, while elite plan advisors expect allocations to CITs in the DC plans they serve to grow from an average of just 10% today to 16% by the end of the decade.

Uncertainty About the DOL Fiduciary Rule Clouds 2017 Outlook

Managers remain committed to the DCIO space, as evidenced by expanding staffs. About 1 in 3 managers added to field sales or home office staff in the past year, while 2 in 5 say hiring additional sales staff is the top priority for 2017. Many also expect to allocate additional resources to staff training in light of the DOL fiduciary rule. However, this training will have to wait, as DCIOs need to first understand how key distribution partners plan to respond to the new regulations before they can determine how to best support them. When asked what changes they will make in response to the DOL rule, the most common response from DCIO sales leaders was "I just don't know yet."

Specialists advisors are more certain about the impact of the new regulation. More than 4 in 5 advisors within the Retirement/Benefits Consultant segment, who specialize in employer benefits and manage more than $1.1B of DC assets on average, believe the fiduciary rule will lead to enhanced business growth. However, those in the Retirement Advisor segment, who have sizable DC businesses ($70M in plan assets on average) but focus on serving affluent individual investors, mostly expect the regulatory changes will lead to more time spent documenting plan decisions, higher costs, and lower margins on DC business. Either way, DCIOs have an opportunity to help intermediaries in both segments adapt to, and benefit from, the new rules.

About The State of DCIO Distribution

The State of DCIO Distribution is Sway Research's annual benchmarking study on the defined contribution arena. Author Chris J. Brown published the first in-depth research study of the DCIO market in 2004. Now in its tenth year, The State of DCIO Distribution provides benchmarks for asset managers as well as feedback from plan advisors. This year's report is based on interviews with DCIO executives and plan intermediaries, as well as surveys of DCIO sales leaders from 25 leading asset management firms with approximately $950B of DCIO AUM, and executives from 124 plan intermediaries with nearly $70B of DC AUM. The surveys and interviews were conducted over the summer of 2016.

About Sway Research

Sway Research provides market data and analysis that empowers financial services executives to make decisions, effect change, and grow revenue. Leading manufacturers and distributors of investment products purchase Sway’s research in syndicated reports, custom research projects, and strategy engagements. Sway is the leading provider of research and intelligence on the defined contribution investment-only market. Please visit www.swayresearch.com for more information.


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