Goldman Sachs Asset Management's effort to expand its small defined-contribution business by offering custom target date funds has caught the attention of advisers, but many worry that such offerings will be too pricey for the smaller 401(k) plans they consult.
“There's room for Goldman in the marketplace to create more glide paths and target date fund solutions,” said Stephen D. Wilt, senior vice president of Captrust Financial Advisors, which manages about $1 billion. “But anytime you do something custom, there's a cost. As you go downmarket, the issue is whether the small-market plans can afford it.”
GSAM is one of the nation's largest managers of defined-benefit assets. But its push to expand its DC business, which was first reported by Bloomberg last month, will be challenging, given the formidable competition it will be facing.
GSAM had just $17.5 billion in 401(k) assets as of the end of March. Mutual fund companies that provide bundled services dominate the list, with leader Fidelity Investments managing $452 billion in 401(k) assets at the end of 2009, according to sister publication Pensions & Investments' list of top 50 DC managers. Goldman was in 30th place, sandwiched between Janus Capital Management LLC and AllianceBernstein LP, which also offers custom target date funds.
Advisers will play a part in GSAM's push, said Bill McDermott, head of its defined-contribution business.
Mr. McDermott said GSAM will work with advisers in a variety of ways. For advisers working with plans, it will provide portfolio components to meet a particular glide path. It also can manage the target date portfolios designed by advisers or consultants and help advisers, consultants and plan sponsors design a target date series, including glide paths and asset allocations.
Goldman sees an opportunity in the increasing popularity of open-architecture DC plans, in which investment management and record keeping are unbundled, and their associated fees are disclosed. As an investment-only provider, Goldman will build target date funds that match a specific plan's demographics and have unique asset allocations and glide paths.
Such customized funds have been gaining popularity among the largest retirement plans, but the demand is also picking up steam among financial advisers, Mr. McDermott said.
“We view it as giving [advisers] the building blocks to build the best portfolios,” he said. “Our view in the marketplace is, you decide who you want to develop the glide path, and we give you the building blocks to build what's under the glide path.”
These services can be valuable for advisers who don't have the internal capability to build an asset allocation model, said Nick Della Vedova, president of Retirement Plan Advisory Group, a practice-management platform for plan advisers.
“Assets are flowing to adviser- and sponsor-built custom models,” he said.
“Many advisers have been doing it in the last few years, especially with larger plans. The plan sponsors are looking for advisers who can deliver,” Mr. Della Vedova said.
Not everyone is convinced, however, that GSAM can offer such customized funds to small plans at a reasonable cost.
“I don't perceive Goldman Sachs to be like [The] Vanguard [Group Inc.] or T. Rowe Price, so I don't know whether they'd be able to do this at an economical cost — that remains to be seen,” said Jason Hochstadt, vice president of Jedi Management Inc.
Thomas J. Fontaine, global head of defined contribution at rival firm AllianceBernstein, said that his firm focuses on plans with $700 million or more in assets.
“When we think of the future of retirement provision in plans, we're talking about larger plans in the marketplace,” he said. “The economics of customization don't work in the smaller segment; they're best-served by mutual funds.”
Mr. McDermott said, however, that GSAM wants to serve all segments of the 401(k) market and that he doesn't expect the costs for plans to rise as a result of their use of customized funds.
Other advisers claim that Goldman will have a tough time competing with asset managers that already offer customized funds.
“Goldman isn't the only one doing non-proprietary, best-in-class [target date funds],” said Shannon C. Main, managing director of Penniall & Associates Inc., which manages $850 million, of which $450 million is in qualified plans. “As an adviser, I want to know more of what they're offering and how it's different.”
To increase its appeal, GSAM eventually plans to attach an insurance element to its products. One design being considered involves the use of dollar cost averaging to allow participants to earmark part of their contribution for guaranteed income and put another portion of their funds in an investment account.
That product is in development, and the firm is waiting for cues from the Labor and Treasury departments on how annuity products can operate within a retirement plan.
Observers note that Goldman's recent public-relations woes may pose a problem for advisers working with smaller plan sponsors.
“The less sophisticated plan sponsors are more focused on the brand and less on the process and program,” said Tom Modestino, associate director at Cerulli Associates Inc., who noted that consultants tend to look at a manager's long-term record.
GSAM, however, views the spate of bad press as merely a short-term blip.
“The reputation of Goldman Sachs over its 140-year history has been stellar,” Mr. McDermott said.
“Over time, if we're developing products of value for the adviser and participants, we'll succeed,” he said. “It's only natural that the solutions we brought to the DB market can be brought to the defined-contribution side as well.”
E-mail Darla Mercado at -firstname.lastname@example.org.