The retirement market, while maturing, is undergoing a number of transformative trends. This is especially true in the 401(k) defined contribution market segment. As retirement responsibility has shifted from employer to individuals, defined contribution (DC) plans have become the dominant solution for retirement savings. The DC market reveals a number of key trends that are driving changes to providing retirement solutions: regulatory and public policy developments, investment product innovations, a focus on fees and expense, and participant demographics. At the core of every defined contribution retirement plan is a lineup of investment options. While the concept of the traditional core menu has remained constant over the years, the growth of open architecture, the introduction of new asset classes and growing dominance of outcome-oriented solutions such as target-date funds, have changed the investment options available to plan sponsors and participants. Mutual funds remain the dominant vehicle to deliver investment solutions, but there is growing interest in other vehicles, such as collective investment trusts (CITs) and separate accounts, as plan sponsors look for more efficient and customized solutions for their participants. PLANSPONSOR recently spoke with John Alshefski, SVP and managing director of SEI’s Investment Manager Services division about these developments.
PS: What are some of the key developments in the retirement marketplace right now?
Alshefski: It is clear that some segments of the retirement marketplace are maturing, while others, especially the 401(k) defined contribution segment, continue to evolve. According to the Investment Company Institute (ICI), the retirement market has assets totaling roughly $25 trillion. While defined benefit (DB) plans fueled the initial growth of this market, defined contribution plans are becoming more of a primary vehicle for workers to invest for retirement. According to our statistics, DC plans and individual retirement accounts (IRAs) make up almost 60% or about $14 trillion of overall retirement assets right now. We anticipate significant growth opportunities in this segment as workers continue to save and invest in DC as their primary vehicle.
PS: What role do you see public policy and regulation playing in the retirement plan industry?
Alshefski: Public policy and regulation have and will continue to play a significant role in shaping the retirement arena. We have seen examples of regulation shaping the overall marketplace. Ten years ago, the Pension Protection Act (PPA) established regulations for qualified default investment alternatives (QDIAs). This fueled the development and growth of target-date funds (TDFs), which now account for over $1.3 trillion in assets. The PPA brought renewed interest by plan sponsors—in plan fees, expenses and structures and caused them to look at other and new types of investment vehicles for retirement plans. Additionally, the proposed changes made by the Department of Labor to the fiduciary standard may affect advice on retirement assets.
PS: What are some industry shifts that you see? What are the implications for plan sponsors?
Alshefski: Probably the biggest shift happening is the unbundling of recordkeeping and plan administration from asset management. The inclusion of third-party solutions means that investors are no longer limited to the recordkeeper’s own product. Recordkeepers manage 43% of the defined contribution market, so they have a significant market share overall, but it is no longer necessary to be a recordkeeper to have your funds on a company’s retirement platform. A majority of professionally-managed DC assets are open architecture. Defined contribution investment only (DCIO) now represents more than $3 trillion of managed DC assets, and is projected to grow to two-thirds of the managed DC market in the next decade. This is a major change from the past and opens up the DC market to a much larger universe of investment managers and investment solutions.
Other innovations include the growth of investment-oriented solutions popularly known as target-date funds, growth in alternative investment structures, and a general institutionalization of the marketplace.