The Cerulli Report Release State of DCIO: Evolving Asset Manager Opportunities in the Mid-Sized and Small Plan Marketplaces

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1 C e r u l l i The Cerulli Report Release a s s o c i a t e s T h e C e r u l l i R e p o r t Recordkeepers influence in the mid-plan segment shifts to advisors and impacts asset gathering for DCIO managers. The DC market has shifted to a focus on simplification and solutions. As a result, the opportunity for Investment Only (IO) managers has changed as access is less readily available. The role of investment gatekeeper in the small- to mid-sized plan segments has shifted from recordkeepers to advisors. How managers structure themselves, manage distribution, and build products are determinants of success. This report examines the factors and players that affect DC investing. It outlines the current state and outlook for opportunities for asset managers and provides a tool for navigating IO distribution. Release: November 2011 Cerulli Associates Boston Singapore London Exclusive data in this report: IO addressable opportunity marketsizing by asset class and product type DCIO staffing changes and roles DCIO wholesaler compensation trends DC assets by method of distribution: direct, retail advisor, institutional consultant This report answers the following questions for asset managers: What is the IO addressable opportunity by segment? Which asset classes offer the greatest opportunity? What is the outlook for passive and active management in DC? Will CITs work in the small- to mid-sized plan marketplace? Who is an advisor and who is a consultant? How should asset managers cover small consultants and specialist advisors? How will shifts in recordkeeper strategy affect DCIO? Key Findings: Cerulli estimates that target-date assets will reach $1 trillion in 401(k) assets in As asset managers continue to grow their DC teams, they may be better served to add a consultant relations position to work with high-end specialist advisors and lower-tier consultants rather than hiring more DCIO wholesalers. The popularity of index products in the DC market is increasing. Active managers need to demonstrate that using index funds still represents choice for plan sponsors and therefore requires due diligence regarding which index is tracked, the use of security lending, and performance. Several recordkeepers are launching strategies to target segments outside their traditional market, which could increase plan turn over and IO opportunities. Recordkeepers influence over investments is waning as advisors are taking on this important role in the small- to midsized plan market. Non-revenue sharing mutual funds should be a higher product development priority than collective trust funds. REPORT ROADMAP (183 EXIBITS) Sample Exhibit: EXHIBIT 32: DECISION MAKERS INFLUENCE ON DCIO FLOWS, 2011 Advisors and consultants are the key decision-makers and therefore the most important clients for asset managers. Plan sponsors 10% Recordkeeper wholesalers 12% Source: Cerulli Associates Investment analysts at recordkeeping platforms 28% Other 1% DC intermediaries 49% Purchase includes: Hardcopy NEW: Color softcopy Online access Exhibits in Excel format Key findings in PDF Analyst access To order: Contact Account Management CAmarketing@cerulli.com Order online Fax form on page 3. Current Environment & Trends Sizing Asset Manager DCIO Structure & Strategy Recordkeepers & TPAs Advisors & Consultants Plan Sponsors & Participants 403(b) Product Demand & Development Attached: Table of contents Exhibit list User examples Sample pages Firm list

2 C e r u l l i The Cerulli Report Release a s s o c i a t e s T h e C e r u l l i R e p o r t USER EXAMPLES Release: November 2011 The following are examples of how this report can be applied to business planning and strategic decision-making: Scenario 1: A large asset management firm with an existing DCIO business is considering changes to better align its business internally, and refine its distribution strategy. in the Mid- Sized and Small Plan Markets provides answers to the following questions: How are asset managers positioning their DCIO business within their organizations? How are DCIO asset managers staffing their sales and support? Do recordkeepers or advisors wield more control over investments in the small- to mid-sized plan marketplace? Cerulli Associates Boston Singapore London Scenario 2: An asset management firm is conducting an annual product rationalization exercise, including a review of the product structures that are most necessary for the various markets in which it competes. It currently competes in the DCIO market and seeks research to create and validate a product development strategy for this marketplace for the coming year. in the Mid-Sized and Small Plan Markets provides answers to the following questions: Which asset management product structures are most relevant in the DC space now and in the future? Is there a role for CITs in the small- to mid-sized plan segments? How should an asset manager rank its DC product development initiatives for the coming year? Scenario 3: An index fund provider recognizes the shift in the DC market toward simplification and solutions. It sees this shift as an opportunity for its firm, but it needs help in validating the benefits and developing a strategic response. in the Mid-Sized and Small Plan Markets provides answers to the following questions: What is the future of passive versus active management in the DC market? How are index funds being used in the DC market? Is passive investing a threat for active IO managers? Scenario 4: A DCIO asset manager has approved additions to staff for the coming year. It needs research to validate the roles that will most impact its ability to gather assets in the DCIO channel. State of DCIO: Evolving Asset Manager Opportunities in the Mid-Sized and Small Plan Markets answers the following questions: What influence do TPAs have over investments in the small- to mid-sized plan marketplace? Are traditional wholesaling strategies effective when selling to small consultants and advisors in the small- to mid-sized plan segments? How should firms be staffing their sales effort for maximum impact in the DCIO channel? For more information on how to apply this report to your firm s unique needs, please contact our Marketing & Business Development team at , CAmarketing@cerulli.com.

3 C e r u l l i The Cerulli Report Release a s s o c i a t e s T h e C e r u l l i R e p o r t PURCHASE DETAILS Release: November 2011 To order, contact: Marketing & Business Development CAmarketing@cerulli.com Order Online at Fax completed form to Purchase includes: Hardcopy NEW: Color Softcopy Online access (unlimited per firm) Exhibits in Excel format Key findings in PDF Analyst access Cerulli Associates Boston Singapore London Fax Back Form: f=ïçìäç=äáâé=íç=çêçéê=íüáë=êééçêí k~ãéw cáêãw qáíäé ^ÇÇêÉëëW müçåéw `áíó pí~íé wáé bã~áäw Upon receipt of the faxed form, we will send you an invoice reflecting the fee. Special Feature: To view thumbnails of the contents of this report, please visit our website at Go to Purchase>Thematic Report Subscriptions and click on view next to the report title. Note: These thumbnails are provided to show the layout of select pages in this report. Full scale views of these pages are not available, unless they are highlighted in blue on our website. Cerulli Associates 699 Boylston Street Boston MA Tel: Maxwell Road Singapore Tel: Page 45 Page Betterton Street London WC2H 9BP

4 TABLE OF CONTENTS INDEX OF EXHIBITS REPORT SCOPE Beneficiaries of this Report Report Roadmap METHODOLOGY KEY FINDINGS SECTION I: DCIO LANDSCAPE CHAPTER 1: CURRENT ENVIRONMENT & TRENDS Why DCIO, Why Now? Regulatory Fee Disclosure Fiduciary Investment Menu Design, Assets, and Leaders Domestic Equity International Equity Fixed Income StableValue/Money Market Target-Date Funds Assets Monitoring Future Other Asset Allocation Strategies Lifestyle Funds Managed Accounts Summary Key Recommendations CHAPTER 2: SIZING Total Plans & Assets Investment-Only Opportunity Methodology Micro Small Mid-Sized Plans Large Mega Product

5 Target-Date Asset Projections Money in Motion Key Recommendations SECTION II: THE PLAYERS CHAPTER 3: ASSET MANAGER DCIO STRUCTURE & STRATEGY Institutional or Retail Intermediary Market Selling Process Personnel/Hiring Case Study Large Investment-Only Managers (>$15 billion in investment-only assets) Case Study Small Investment-Only Managers (<$15 billion in investment-only assets) Asset Tracking & Compensation Personnel and Investment-Only Flows Profitability, Strategy, & Challenges Key Recommendations CHAPTER 4: RECORDKEEPERS AND TPAs Recordkeeping Landscape Recordkeeper Opportunity Case Study: JPMorgan Retirement Plan Services Case Study: Diversified Retirement Corporation Targeting New Segments Plan Conversions & Fund Mapping Revenue Sharing Working with Recordkeepers Influence of Third-Party Administrators Working with TPAs Key Recommendations CHAPTER 5: ADVISORS & CONSULTANTS Advisor/Consultant Influence by Segment Less than $10 million Segment Case Study: GPS Investment Advisors $10 million to $50 million segment Case Study: CapTrust Case Study: Longfellow (LPL) $50 million to $100 million segment Greater than $100 million Segments

6 Retirement Specialist Overview Case Study: FDG Institutional Consulting Group at UBS (Institutional Consulting at Broker/Dealer) Case Study: Fiduciary Investment Advisors (RIA) Specialist Advisor Sizing Dabblers & Non-Producers Due Diligence & Recommendations Working with Advisors Advisor Perspectives Key Recommendations CHAPTER 6: PLAN SPONSORS & PARTICIPANTS Large-Plan Sponsors Small-Plan Sponsors Investment Monitoring Participant Investing Participant Engagement Participant Trading Key Recommendations SECTION III: FUTURE OPPORTUNITIES CHAPTER 7: 403(B) Recordkeepers Market Segments (b) Investment-Only Opportunity Advisors/Consultants Case Study: Cammack LaRhette Key Recommendations CHAPTER 8: PRODUCT DEMAND & DEVELOPMENT Investment Vehicles Mutual Funds or Collective Trusts? ETFs Asset Classes Simplification & Solutions Case Study: United Technologies Multimanager Standalone Funds Custom Target-Date Strategies Fully Custom

7 Glidepath Overlay Active or Passive Alternatives Key Recommendations COMPANY INDEX

8 INDEX OF EXHIBITS CHAPTER 1: CURRENT ENVIRONMENT & TRENDS 1. Top-25 Managers of Public and Private Dssets, Largest Managers of Domestic Equity Dssets, Largest Managers of International Equity Dssets, Largest Managers of Domestic Fixed Income Dssets, Largest Managers of Stable Value Dssets, Largest Managers of Target Date Dssets, Total Dssets in Target-Risk Funds, Top-10 DC Managed Account Sponsors by Assets, 1Q Q CHAPTER 2: SIZING 9. Total Retirement Market Assets, E Percentage of 401(k) Plans by Asset Segments, Active 401(k) Participants by Asset Segment, (k) Investment-Only Addressable Assets, (k) Micro Plan Segment Investment-Only Addressable Assets by Asset Class, (k) Small Plan Segment Investment-Only Addressable Assets by Asset Class, (k) Middle Plan Segment Investment-Only Addressable Assets by Asset Class, (k) Large Plan Segment Investment-Only Addressable Assets by Asset Class, (k) Mega Plan Segment Investment-Only Addressable Assets by Asset Class, (k) Investment-Only Addressable Assets by Product, Projected 401(k) Target-Date Assets and Contributions, E Estimated Total Dssets and Sales, 2Q 2011E CHAPTER 3: ASSET MANAGER DCIO STRUCTURE & STRATEGY 21. DCIO Firm Separation of Retail vs. Institutional Opportunity, Current and Anticipated Defined Contribution Investment-Only Headcount by Functional Role, E Current and Anticipated Defined Contribution Investment-Only Headcount by Functional Role, E Percentage of Dsset Flows Tracked to Plan, Wholesaler & Advisor, DCIO Wholesaler Salary as Percentage of Compensation, DCIO External Salesforce Components of Compensation, Firms Compensation Offerings by Compensation Type,

9 28. DCIO Wholesaler Strategy for Identifying Intermediaries, Defined Contribution Investment-Only Estimated Net Flows and Personnel, DCIO Estimated Flows, 2011E DCIO Firms Greatest Challenge for Gaining Dssets, Decision Makers Influence on DCIO Flows, DCIO Firms Top-Three Reasons for Winning DCIO Mandates, CHAPTER 4: RECORDKEEPERS AND TPAs 34. Total Dssets, Plans, Participants Recordkept, Ranked By Assets, DCIO Opportunity by Top-Ten 401(k) Recordkeepers, Defined Contribution: New Plans Added, Recordkeeper Perspective: Estimated Plan Sponsor Investment Conversion Choice, Recordkeeper Two-Year Expected Change in Plan Sponsor Payment of Recordkeeping Costs, Recordkeeper Offered Investment Services, TPA-Controlled 401(k) Assets, TPA Standard Plus Model TPA-Controlled Asset Share by Segment, TPA Top-Choice Recordkeeper Partners and Reason for Selection, CHAPTER 5: ADVISORS & CONSULTANTS 44. Defined Contribution Plan Decision Making by Segment, Private Defined Contribution Assets by Method of Distribution, RIA DC Specialist Service Model DC-Focused Advisor Headcount and Marketshare by Channel, Advisor-Sold Defined Contribution Plan Assets by Channel, DC Specialists: Percentage of Book in DC Plans by Channel, Advisor Perspective: Plan Sponsor Criteria when Considering Investment Recommendations, Advisor Perspective: Top Characteristics of a DCIO Wholesaler by Channel, Advisor Perspective: Top Characteristics of a DCIO Wholesaler by Retirement Plan Focus, Advisor Perspective: Plan Sponsor Fee Disclosure Method by Channel, Advisor Perspective: Plan Sponsor Fee Disclosure Method by Retirement Plan Focus, Advisor Perspective: Planned Investment Changes to DCIO Plans by Channel, Advisor Perspective: Planned Investment Changes to DCIO Plans by Retirement Plan Focus,

10 CHAPTER 6: PLAN SPONSORS & PARTICIPANTS \57. Greatest Concern for 401(k) Plan Sponsors, (k) Plan Sponsor Greatest Challenge for Adding In-Plan Income Solution, Importance of Health Insurance vs. Employer Funded Retirement Plan, Accountability for Selecting and Monitoring Investment Options a Company s Retirement Plan, Average Number of DC Investment Options Offered and Used, DC Participant Use of Advice Services, Percentage of DC Participants Trading, CHAPTER 7: 403(B) 64. Estimated 403(b) Plan Assets, E Leading 403(b) Plan Providers, Percentage of 403(b) Assets in Investment Vehicles, 2009 vs (b) Investment Contract Sales Trends, (b) Market Segmentation, (b) Plan Providers: Segment Exhibiting the Most Growth Over the Past and Next 5 Years, Change in ERISA-Plan Status, 2005 vs (b) Providers Report Percentage of 403(b) Plans That Consolidated Vendors, Advisor-Sold 403(b) Assets, (b) Investment Monitoring, 2009 vs CHAPTER 8: PRODUCT DEMAND & DEVELOPMENT 74. Investment Vehicles Greatest Opportunity by Market Segment, Products In Development for DC Plans, Projected 2015 DC Plan Asset Allocation, Asset Manager Perspective: Expected Plan Sponsor Two-Year Change in Investment Lineup, E Average Number of 401(k) Investment Fund Options, DC Target Date Managers, DC Index Target-Date Assets and Flows as a Percentage of Total Dssets and Flows, DC Plan Inflation Protection Strategies Offerings by Plan Asset Size, Top-10 Appropriate Non-Core Asset Classes as Standalone Options, Top-10 Not Appropriate Non-Core Asset Classes as Standalone Options,

11 REPORT SCOPE in the Mid- Sized and Small Plan Marketplaces, the most recent study in The Cerulli Report TM series, examines the factors and players that affect defined contribution investing. The report outlines the current state and outlook for opportunities for asset managers and provides a tool for navigating investment-only distribution. Beneficiaries of this Report Strategies outlined in this report should help various types of firms operating within the financial services industry: Asset Managers: institutional and retail managers that seek to win defined contribution mandates, and are interested in developing products to meet the future demands of the defined contribution market. Providers: recordkeepers that need to understand the investment needs of prospects and clients to create solutions that will meet these needs and help win business. Retirement Specialist Advisors and Consultants: those who are committed to the defined contribution business and want to understand the future trends that will shape the industry. Report Roadmap The report begins with an examination of the current environment, including regulatory trends and asset holders, and includes a sizing of the investment only opportunity by market segment and asset class. Next, the report takes a look at the players involved in the defined contribution market and their roles and influence in determining which investment products win defined contribution mandates. Finally, the third section provides insight into future opportunities through the 403(b) market, product development, and the evolution of plan design. 12

12 METHODOLOGY The following analysis of the recent developments and outlook for defined contribution investment-only relies on a combination of quantitative and qualitative analyses conducted by Cerulli Associates. Our research draws upon our own market insight and proprietary data, as well as our analysis of third-party information sources. Cerulli DCIO Survey A proprietary survey of the population of asset managers that are active in the defined contribution investment-only market is used as a data source for the discussion of asset managers and product development. Data obtained from this survey is also used for other research report topics. Cerulli Advisor Survey A proprietary survey of advisors serves as a foundation for evaluating retirement specialist advisors, their influence, and perspectives. CA administers all surveys through our proprietary data-gathering engine at Qualitative Interviews As part of our ongoing research initiatives, CA analysts regularly interview key executives asset management firms, as well as other industry observers. For the purposes of this report, CA analysts conducted a number of qualitative conversations with executives at asset management firms of various sizes, focusing on defined contribution distribution teams, investment vehicles and asset classes, and interaction with other players in the defined contribution market. We also interviewed advisors and consultants who are active in the defined contribution market to gain an understanding of their practices and the perspective of their plan sponsor clients As with all Cerulli Reports TM, additional information in this report was obtained from third-party public and non-confidential sources that Cerulli Associates believes to be reliable, and we have made every reasonable attempt to verify it; however, CA does not guarantee its accuracy or completeness. 13

13 SAMPLE SECTION from THE CERULLI REPORT: STATE OF DCIO: EVOLVING ASSET MANAGER OPPORTUNITIES IN THE MID-SIZED AND SMALL PLAN MARKETPLACES

14 that retirement specialist advisors hold the most influence in this segment of the market, but they still consider getting a place on a recordkeeper s selected list of funds to be a challenge in gaining defined contribution assets. This may be true if the plan is not working with the advisor, but the trend toward advisor use continues to increase. Thus, the selected list is less relevant than it once was. As long as the fund is available on the platform, then targeting the advisor is much more likely to lead to success in gaining defined contribution assets. EXHIBIT 32: DECISION MAKERS INFLUENCE ON DCIO FLOWS, 2011 Advisors and consultants are the key decision-makers and therefore the most important clients for asset managers. Plan sponsors 10% Other 1% Recordkeeper wholesalers 12% DC intermediaries 49% Investment analysts at recordkeeping platforms 28% Source: Cerulli Associates 78

15 broker/dealer for small business that do not want to pay a hard dollar fee, and the RIA for larger businesses that can afford the fee and place a premium on fiduciary advice. Since these advisors work with larger plans and accept fiduciary status, it is likely that they operate in a similar manner with clients that pay the fee through commissions only they cannot sign as co-fiduciary. Therefore, they are better compared to the RIA channel than any of the broker/dealer channels. The RIA and dually registered channels, because of their ability to conduct fee-only business, are able to attract larger plans and therefore have more assets per advisor than the other channels. RIAs are far and away the leaders in the percentage of their book of business represented by defined contribution plans. These are the true specialists that are committed to the retirement business. Insurance broker/dealer advisors work with the smallest plans. EXHIBIT 49: DC SPECIALISTS: PERCENTAGE OF BOOK IN DC PLANS BY CHANNEL, 2010 RIAs that specialize in defined contribution plans are more likely to be completely focused on defined contribution plan consulting. 90% 80% 70% 60% 82.1% 69.9% 67.2% 65.4% 65.0% 69.3% 50% 46.3% 40% 40.0% 30% 20% 10% 0% RIA Insurance B/D Dually registered Independent B/D Regional B/D Wirehouse Bank B/D All DC specialists Sources: Cerulli Associates, in partnerships with the College for Financial Planning, the Financial Planning Association, the Investment Management Consultants Association, Morningstar, and Advisor Perspectives 114

16 INDEX OF COMPANIES ACS ADP , 48 AllianceBernstein , 150, 152, 153 American Century American Funds , 27, 28, 29, 34, 93 Bank of America Barclays BlackRock , 26, 32, 34, 36, 152, 153 Callan , 148 Cammack Lahrette , 142 Capital Research CapTrust , 107 Charles Schwab , 99 DiMeo Schneider & Associates , 156 Diversified Retirement Corp , 86, 87, 88, 134, 138, 142 Dreyfus Eaton Vance Fi Fidelity , 24, 25, 26, 27, 29, 34, 36, 47, 48, 50, 64, 85, 86, 87, 134, 138 Fiduciary Investment , 111 Financial Engines , 88 Franklin Templeton , 84 Geode Capital Management Goldman Sachs , 26 GPS Investment Great-West , 86, 138 Hartford , 47, 81, 83, 84, 89, 90, 99 Hewitt Hitachi Data Systems Independent Financial ING , 86, 134 Invesco , 75, 84 ishares John Hancock , 47, 98, 99, 104, 105 JPMorgan , 24, 32, 34, 35, 84, 87, 88, 89, 90, 93 Legg Mason Longfellow Advisors

17 Loomis Sayles Lord Abbett LPL , 107 Mellon , 32 Mercer , 39, 87, 157, 158, 159 Merrill Lynch , 87, 110 Mesirow , 39, 129 MetLife , 50 MFS , 25, 75, 84, 144 MSCI National Financial Nationwide , 89, 90, 97, 99 New York Life , 50 Newport Group Northern Trust Oppenheimer PIMCO , 29, 30, 151 Principal , 86 Prudential , 24, 36, 40, 86, 87, 93, 95, 110, 154 Putnam , 84 Russell SEI Sentinel Benefits & Financial Group State Street Global Advisors , 152, 153 T. Rowe , 24, 25, 26, 27, 34, 46, 48, 49, 51, 86, 87, 90 TIAA-CREF , 27, 85, 86, 134, 137, 139 Transamerica , 125, 126 UBS , 105, 110 United Technologies , 82, 150 VALIC , 138 Vanguard , 26, 29, 30, 34, 36, 48, 49, 51, 54, 55, 58, 59, 80, 87, 89, 90, 128, 129, , 131, 146 Wells Fargo , 36, 85, 86, 87 Western Asset Management