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Defining Your Contribution To DCIO Programs


Mutual fund assets within Defined Contribution Investment Only programs, which are used to support 401(k) retirement plans, have been growing in size and disparity in recent years.

The name derives from the fact that the funds are offered by third-party fund firms on retirement platforms operated by financial services firm such as Fidelity Investments and T. Rowe Price.

By Sway Research 's estimates, the industry has grown from $911 billion in assets in 2001 to more $2 trillion as of the end of 2010. That is expected to reach $3.3 trillion by 2015.

In its latest study, State of DCIO Distribution: 2012-Making the Most of Limited Resources to Thrive in a Maturing Market, the Newton, N.H.-based research and consulting shop also estimates that the average Tier 1 manager (those with at least of $15 billion in assets under management) added nearly $8 billion of DCIO assets from June 2010 to June 2011. Of that, about $1.5 billion came in the first half of last year.

Size Matters

The study also revealed that the "rich" of the DCIO market are getting richer, as Tier 1 firms appear to be reaping the benefits of outsized investments in sales talent and marketing expenditures relative to Tier 2 competitors (firms with between $5 billion and $15 billion in AUM).

"The Tier 1 firms are really pulling away from the pack in terms of the amount of sales they're generating per dollar of expenses and the amount they're bringing per person in the field," says Chris J. Brown, principal of Sway Research.

"Their economies of scale are really starting to kick in and it's really difficult right now for smaller firms to penetrate the market. Some of these smaller firms have to establish asset growth within the next three to five years or they may not make it in the retail end of the market because the larger firms have been spending a lot of money in marketing and headcounts in this space within the last few years," Brown says.

Most Tier 1 firms, have at least five external sales people in the field and three internal sales people at a minimum focused on advisors, wirehouses and broker-dealers, he says. They also have four or five key accounts personnel to focus on relationships with the different recordkeeping platforms too. And most of these firms also have one DCIO person dedicated to marketing as well.

Arming David to Battle Goliath

So with experience and resources stacked against them, what can smaller fund firms do to win DCIO assets? Brown suggests that some Tier 2 and 3 firms don't have enough bodies in the field or experienced retirement wholesalers to understand and tackle the DC market.

Brown said that in the $50 million and under market where advisors are making the decisions, value-added programs such as white papers on legislation and investment menu analytics for advisors are necessities. "Invesco has a great program called the Final Word, which is about the words you use when pitching to plan sponsors and investment committees. It's really powerful stuff," he said.

And value-adds are also important for platform wholesalers from insurers like Principal Financial or MassMutual, which have teams of wholesalers selling their recordkeeping platforms to advisors. Fee benchmarking of recordkeeping platforms has been growing in popularity, especially among high-end advisors serving $10 million to $30 million plans, says Brown.

But there are angles to take. "If you're a smaller firm, instead of building something internally, take your expertise and try to become a part of a target-date fund or an asset allocation that's offered in the DCIO market," says Jeffrey S. Masom, Head, Financial Institutions for Legg Mason. "Our data shows that there are about 1,500 advisors driving half of the advisor-sold retirement business. If I was starting from scratch, I would try to attack that large-plan market via consultants and target firms with proprietary target-date funds that will eventually open up and add non-prop sleeves within their models. That's a better use of your time than going out and hiring as many wholesalers as we have."

According to Masom, his firm is looking to raise assets for its own target-date fund and partner with certain retirement platforms because the firm doesn't have its own retirement platform so it's not perceived as a competitor to other platforms. "We've traditionally been strong in the large plan market but we've fallen out of favor back in 2007-2008 and I would expect that we continue to pick up better market share there," he says.

Legg currently boasts a sales team of 13 people and it is looking to add another wholesaler in the coming weeks. The firm has three wholesalers who cover small-to-large platforms such as Fidelity and Schwab. The firm's eight external wholesalers cover the recordkeeping platform wholesalers and call directly on large plan advisor market, including Registered Investment Advisors, independent advisors and broker-dealers, according to Masom.

"It's a great business because there are steady streams of slows. It's sticky money and it's a high-margin business," he says.