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fund companies for marketing help with events, but I see that
as a conflict. We're careful about even going out for lunch. "
Beyond Mutual Funds
Like most developments in the retirement business, DCIO
structures started with the largest plans and spread to
smaller plans due to competition and improvements in technology.
Low-cost collective investment trusts (CITs) were
once available only to large plans, Griffin says. " It used to be
that plans needed assets of $100 million to access collective
trusts, but that has decreased to below $25 million, " he says.
" If a collective trust is the right investment and will save our
client money, we'll consider it. "
Porteous reports that his firm has devised DCIO collective
trusts with zero minimums. " We look at the recordkeeper
as an omnibus relationship, giving us one buy and
one sell transaction, and the recordkeeper disseminates the
details to the underlying plans, " he says. " That allows for no
minimum, from the plan perspective. "
Integrated Architecture
As with other aspects of the DC business, because of
widening costs, narrowing revenues and investment
complexity, open architecture DCIO structures may have
started transforming-not regressing entirely to in-house
proprietary funds but retreating to a limited fund menu.
" For a long time, there was a trend away from bundled funds
and recordkeeping toward open architecture, but lately
that has reversed somewhat to a semi-closed architecture, "
Dopp says. Other observers named the phenomenon " integrated
architecture " or " managed architecture. "
A rationalization on the investment side is logical. Jeffrey
Ptak, head of global manager research at fund researcher
Morningstar in Chicago, points out that last year, of the
nearly 8,000 mutual funds in the U.S. market, the largest
900 accounted for 80% of assets. The many at the small end
levy high fees, too, which does not play well in a climate
where many investment decisions emphasize cost. As Ptak
wrote in the Winter 2019 issue of Morningstar's magazine
for advisers: " [T]hese undersized, pricey funds are increasingly
finding themselves on the outside looking in. "
Several recordkeepers have initiated platforms
that
restrict the number of fund managers. One is Empower
Select, offered by recordkeeping giant Empower Retirement.
PLANADVISER contacted Empower several times for
comment on the structure and economics of the program,
but our emails went unanswered.
The Empower Retirement website lists 22 asset managers,
including marquee names such as Pimco,
Invesco, BlackRock
and Fidelity, as well as Empower affiliate Great-West
Financial, and notes that additional funds are available.
Even though Empower declined to talk, industry sources
were well aware of this program and eager to share their
views, although for the record only selectively.
Observers report that fund managers pay Empower
Select an annual fee for including their funds, ranging from
$250,000 to $1 million depending on the number listed.
The fees help defray the cost of recordkeeping charged to
DC plans. The target market for Empower Select is said to
be plans with assets of $50 million and below-especially
those with less than $10 million. The field sales force is
said to be fairly large, at 60 or 70. In general, the industry
considers it a serious competitive threat.
Reaction to the concept within the industry has been
mixed. " I won't speak to any one program, " says Martielli
of Vanguard,
" but we've had a longstanding philosophy
and practice of not paying recordkeepers for distribution of
our funds. And it's not just about cost-it's about transparency,
as well. The end participant doesn't know what sort of
payment is going to that platform provider and the potential
incentives to skew sales. "
" Empower is huge, and it knows where the puck is going
in this business, " says the head of DC at one of the manager
firms participating in Empower Select. " It's created a product
that is cheaper than everyone else's, but it's not transparent
to the consumer, and that's not a good thing. But we're in it
because we have to be. "
Mike Miller, head of retirement distribution for U.S.
funds at J.P. Morgan Asset Management in New York City,
notes, " One objection I have seen to Empower Select is that it
replaces the judgment of the adviser or firm home office for
manager selection and due diligence. " His firm, too, participates
in Empower Select. " A lot of that is already worked. But
there is still an opportunity for advisers to put their views
on the investment lineup at the asset-class level. "
Griffin views Empower Select as one more opportunity
to propose to clients. " Empower Select has been a controversial
product, but from [the provider's] perspective, it's been
smart, " Griffin says. " Plans don't need 10,000 mutual funds
to choose from, and certainly an adviser can select a portfolio
from 25 managers and 1,000 funds. We walk clients
through the pros and cons and tell them they can have
the whole world and it will cost a little more, or a smaller
universe that will cost a bit less. " Griffin adds that, while
his firm has proposed the idea a few times, so far, no clients
have signed on.
Others see Empower Select as an inevitable concession
to the pressures of an industry where many sales decisions
are motivated by fees. " Over time, advisers have demanded
open architecture, but the vast majority of funds were never
used, " says Dick Darian, an investment industry veteran
and currently head of Wise Rhino Group, a merger and
acquisition advisory firm, in Mount Pleasant, South Carolina,
that focuses on the retirement industry. " There's a
need to improve the industry's economics and for advisers
to pick fewer investment management partners, which is
happening anyway. "
He adds: " Empower has invested in its technology and
service model and calls it 'the supermarket.' It is enabling
fund companies to put their cans of soup on the shelf. It's
smart to limit the number of partners and help them deliver,
and there is a price point for that. " He points out, however,
" The jury is still out on whether that money is worth the
investment. " -John Keefe
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