In the large defined-contribution-plan market — the realm of plans larger than $1 billion — the norm is for money managers to sell directly to plan sponsors and work cooperatively with the plan's consultants. For smaller plans, the defined contribution investment-only (DCIO) groups at these asset managers have generally sold only through advisers.
But that's about to change.
Traditionally, money managers have had three distribution strategies for the defined contribution market, varying by plan size:
• $1 billion-plus: direct and through consultants
• $250 million to $1 billion: through advisers and consultants
• Under $250 million: through advisers
But times are changing. Consultants are moving down market, advisers are moving up market, and "tier-two" consultants are emerging. (Tier-two consultants have large books of DC business, but don't have the footprint of the biggest national firms such as Towers Watson or Mercer.) Advisers and consultants are also trying to sell their own proprietary asset management products as a hedge against declining advisory fees. The growth of professionally managed investments like target-date funds have added another entity against which DCIOs must sell.
There are almost 50 DCIO shops calling on the same 2,500 elite plan advisers, those with more than $250 million in assets under management and 10 DC plans under their purview.
On the other hand, there are over 2,600 DC plans with $250 million to $1 billion and almost 4,000 plans with $100 million to $250 million. Selling direct to plan sponsors almost triples the market opportunity for DCIO firms scrambling for assets and looking to leverage their brand, people and intellectual capital.
DCIOs need and want to be able to tell their story directly. There's a parallel here to pharmaceutical companies, which advertise prescription drugs to consumers.
First-movers will have an advantage. While I'm not at liberty to name names, a few DCIO firms that have a rich history of selling direct have already started, and another firm, which has gathered tens of billions of assets in the high-net worth market by going direct, is ready to enter the DC market.
Should advisers be concerned?
Record-keeping firms that sell direct to plan sponsors clearly present a threat to plan advisers, because the adviser never enters the relationship. That is why very few providers focused on the $1 million-$250 million market maintain a purely direct-sold model. With almost 90% of these DC plans using an adviser, the reasons to work with them are compelling.
Most adviser-sold record keepers that have proprietary funds on their platform have created a separate DCIO group to focus on selling investments through advisers to avoid potential conflicts.
But, in truth, direct-sold DCIOs are not looking to cut out advisers. That's not just to retain good relations with them, but also because they have no incentive. More plan advisers are moving to a fee-based model whereby advisers are paid directly by the plan sponsor or out of plan assets, not commissions. So there's no additional cost, either real or apparent, for DCIOs to sell through advisers, if they don't have to pay out those commissions. And most smaller plan sponsors do not have the staff or expertise to select and monitor their investments as a prudent expert, as is required by law.
Because DCIOs focus on elite plan advisers, they may find opportunities they can pass on to those experienced advisers when calling directly on plans that use inexperienced advisers or may be looking for a new one. Many plans struggle to find a new adviser or even conduct due diligence on them, and DCIOs may be able to fill that gap.
So, like it or not, times are changing, and elite advisers that have good relationships with their DCIO partners stand to benefit.
Fred Barstein is the founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews' Retirement Plan Adviser newsletter.