Investment Evolution

John Alshefski

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. 

There is significant growth in structures other than mutual funds to deliver investment solutions to plan participants. Leading this trend is collective investment trusts (CITs), which are poised to account for roughly a quarter of defined contribution managed assets in the next decade. They offer a number of significant attributes that plan sponsors find attractive including multiple share classes, customized fee schedules, and additional distribution administration fee options. CITs can have customized portfolios, include alternative asset classes, and use multiple managers. Overall, they are often lower-cost vehicles versus mutual funds.

Another innovation we are seeing is what many call the institutionalization of the business. Plan sponsors in their mutual fund structures, CITs and separate accounts are taking a more institutional approach and eliminating revenue sharing components with the various plan service providers.  

PS: What are some of the key investment innovations currently in the marketplace? 

Alshefski: We are seeing significant interest and growth around target-date funds. There are more than 90 target-date products offered by nearly 50 managers and consultants. There are also more than $180 billion of assets in managed accounts, which offer professional management of purchased accounts on a discretionary basis. We are seeing innovation in annuities and guaranteed income products. All of this is driven by regulation, plan participant demographic changes and a more solution outcome orientation by plan sponsors.  

PS: How are these best practices evolving, and how do you expect them to continue to evolve?

Alshefski: We should continue to see the unbundling of investment solutions from services as we discussed earlier. Solution-oriented products such as target-date funds should continue to gain popularity. Helping plan participants make better investment decisions will lead to increased interest in managed accounts, which professionally manage portfolios during their accumulation phase and through their drawdown phases. For beta-only strategies, collective trusts have been a preferred vehicle for index strategies, because of their low cost.  

We’re seeing a lot more of open architecture with regards to investment solutions. The growth of what is referred to as DCIO has opened the DC arena to boutique managers, partnering with custodians on turn-key solutions like CITs and mutual fund series trusts to offer a broader array of investment strategies to plan participants and bring the overall expenses down. Collective trusts are especially effective at lowering the total net operating costs and provide managers with that investment option at a lower cost.  

PS: What are plan sponsors doing in light of all of these innovations and regulation, and what do they have the ability to change in their plans? 

Alshefski: Plan sponsors have the ability to unbundle the overall solution, to offer the best-in-class options to their plans. Many are looking to do so at lower fees and expenses; they are moving beyond mutual funds into other vehicles, including collective trusts and separate accounts; and they are developing their own fund lineups. Therefore, they are opening up for more third-party products. 

PS: What is over the horizon? How do you respond to these industry changes? 

Alshefski: SEI prides itself on being an evolving and innovative company. We will continue to work with both plan sponsors and asset managers to help them offer innovative retirement-oriented solutions. Recently, we worked with two major plan sponsors to help them offer a more customized set of investment options to their plan participants using a CIT structure and our turnkey mutual fund series trust. We believe more plan sponsors, especially the larger plans, will take this approach.  

We will also continue to work with investment organizations to help them meet the customization demands of plan sponsors and plan participants. We have worked with a number of large mutual fund managers to help them offer their investment strategies in CIT form to meet client demands. We are also working with boutique institutional managers who are taking advantage of the growing DCIO trend to offer their investment strategies to plan sponsors using CITs or mutual funds.  

We see this as part of a growing trend in the investment management industry and that we identified in a white paper published earlier this year. Titled Evolving in the New Operational Frontier, we identified nine key trends that were changing the competitive environment for investment managers. One of the key trends we identified was that managers will increasingly need to offer their investment management expertise in a variety of vehicle structures. We are seeing this trend play out in the DC market with the growth of CITs, for example. We will continue to help the industry in other areas including servicing target-date and retirement income products. The development of ETF platforms that deal with fractional share issues, money market reform and floating NAVs could lead to overall marketplace changes and collective trust fund growth. At SEI, we will continue to change and evolve as Baby Boomers move from savings and investing to decumulation and to help plan sponsors and investment organizations meet these challenges.

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