Company Press Release

DCIO Market Strong & Growing, to Top $3 Trillion by 2017

Managers Adding 0/0 Shares, Leveraging Resources to Keep the Flows Coming

Nov. 14, 2012 (Hingham, MA) – Growth of the defined contribution investment-only (DCIO) market continues to outpace that of the DC plan market overall. Today, 46% of DC assets are investment-only versus just 36% a decade ago. Hearts & Wallets projects the share of IO managers will reach 49% in 2017. This is just one finding from Hearts & Wallets' latest in-depth study of the DCIO market, The State of DCIO Distribution: 2013—Adapting to, and Capitalizing on, Industry Change (formerly the Sway Research study).

Today, DCIO assets total $2.2 trillion, while the total DC market is $4.9 trillion. Hearts & Wallets projects DCIO assets will be $3.1 trillion at year-end 2017, while assets in DC plans will reach $6.2 trillion. Hearts & Wallets surveyed 29 asset managers for this year's report—the eighth DCIO study authored by Hearts & Wallets' principals dating back to 2004—and found that 4 out of 5 managers have experienced net DCIO inflows year-to-date. The strategic importance of DCIO sales and marketing is growing as this business is now responsible for 21% of firm-wide gross sales at the average asset manager, up from just 18% in 2009.

Willingness to Adapt Keeps the DCIO Flows Coming

There's nothing staid about DCIO sales and marketing—it's constantly evolving, often in response to legislative changes, such as the recent rules changes to increase the disclosure of fees to plan sponsors and participants. As a result, 7 out of 10 managers have added (or plan to add) 0/0 shares (also known as R-6 shares), from which revenue-sharing costs have been stripped, so as to allow for clean reporting of the costs of plan administration and investments. In addition, nearly half of managers say they have built (or plan to build) value-add programs that help advisors address, and benefit from, increased fee disclosure.

"To-date, the bulk of 0/0 share sales have been generated in the mega plan segment (plans with more than $250 million of assets), said Chris Brown, Hearts & Wallets principal, "but, as with many asset management trends, we expect the use of these shares to quickly move down market." Furthermore, Hearts & Wallets' survey of retirement-focused advisors reveals a desireto shift away from commission-based DC business to asset-based and flat-fee pricing, which favors zero-revenue shares.

Leveraging Resources from Around the Firm

DCIO is, and has always been, a leveraged business, in that it generally sits between retail and institutional sales and leverages sales and marketing resources from each of those areas. In 2012, 9 out of 10 asset managers pay retail wholesalers on a portion of their annual DCIO sales, up from about 3/4ths of managers in 2009. Furthermore, DCIO marketing units continue to leverage resources from other areas of their firm as well.

"In 2012, managers will leverage nearly $300,000, on average, of additional marketing resources from retail and institutional units for the DCIO effort," added Brown. This is on top of the nearly $700,000 being spent specifically on DCIO marketing at the average asset management firm. DCIO sales are also typically generated across a mix of retail and institutionally-priced investment vehicles. In 2012, managers report generating an average of 56% of DCIO flows from retail-priced mutual fund shares—meaning those with 12b-1 fees designed to compensate an advisor—and 44% of from institutional fund shares, collective investments, or institutional separate accounts.

Hearts & Wallets' latest DCIO study—the firm’s sixth in-depth examination of the DCIO market (prior studies were published under partner firm Sway Research)— is based on surveys and interviews with 29 DCIO sales leaders, 8 DC platform gatekeepers, and approximately 100 retirement/benefits consultants and retirement-focused wirehouse- and independent brokerage- based advisors. <

For complete data on this study or the firm’s other research, contact Hearts & Wallets

www.heartsandwallets.com.