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Retirement Perspectives

Major changes will likely define the defined contribution investment-only market in 2018. 

Throughout the wave of proposed and realized regulatory changes in the defined contribution marketplace, broker/dealers and record keepers search for solutions for what, frustratingly, has become a moving target. Top retirement advisors are leaning heavily on service providers to address these proposed changes. How this might play out in the coming year is difficult to predict, but several themes have started to emerge:

Response to the Department of Labor (DoL) Fiduciary Rule
Cerulli Associates, the Boston-based asset management research firm, has backed off on its prediction of a dramatic slowing of IRA rollovers owing to implementation of the fiduciary rule, but many wirehouses and broker/dealers have reevaluated their policies around rollover practices.

Wrestling with Aggregators
Firms such as NFP Retirement, Global Retirement Partners, and Sheridan Road have each experienced solid growth, as broker/dealers scramble to find custom technology and product solutions for their retirement-focused advisors. The major broker/dealers and wirehouses are looking to slow this growth by creating proprietary solutions and additional value for their retirement advisors. The retirement-advisor aggregators have the benefit of a great head-start on these solutions, but the large broker/dealers are well-resourced to be able to catch up in this competition.

Broker/Dealers Will Continue to Outsource
Prior to pressure from the DoL, broker/dealers were deferring fiduciary status to designated advisors and outside fiduciary experts. Early indicators are that many broker/dealers are looking to create in-house fiduciary solutions, leveraging their vast research capabilities and strong balance sheets. Look for technology providers, such as Envestnet and RPAG, to drive this trend further.

Product Vehicles
Collective investment trusts (CITs) and other such approaches have been booming in recent years because they are more affordable to smaller defined-contribution plans and because they are more efficient platforms for unitized, multi-manager solutions. Look for CITs to continue expanding their market share—not just as a lower-fee alternative to other investment vehicles but also as a flexible path to custom solutions. Also look for continued growth in custom target-date funds and target-risk strategies, as asset managers work together to distribute these products through the advisor-sold market.

Record-keepers Hamstrung by a “Race to the Bottom”
The assets of defined contribution plan record-keepers hit $5.5 trillion for the year ended September 30, according to the latest Pensions & Investments survey of the largest record keepers. But in our recent Defined Contribution Advisory Board meeting, many of the country’s top retirement advisors expressed concern that deteriorating business conditions have made it difficult for the record-keepers to maintain their same level of service that they had been accustomed to. We expect the trend to move toward less fee compression and more de-commoditization of recordkeeping with the top retirement advisors. For similar reasons, record-keepers likely will continue to find creative ways to drive assets into proprietary products, as DCIO providers evaluate their tightened budgets.

Looking Ahead
While it may take several years for the competitive landscape to evolve, significant transformation has already begun. As margins become squeezed, service providers need to find creative ways to gain scale and remain profitable. Firms need to be fully committed to their defined contribution strategy, taking measured tactical steps to be relevant in a shrinking industry.

 

This article has been prepared exclusively for use by analysts, institutional investors and their consultants, registered investment advisors, broker-dealers, and sponsors of plans with a minimum of 100 participants. It is not intended for, and should not be used with, small plan sponsors, plan participants, or the public.

To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter.

The information is being provided for general educational purposes only and is not intended to provide legal or tax advice. You should consult your own legal or tax advisor for guidance on regulatory compliance matters. Any examples provided are for informational purposes only and are not intended to be reflective of actual results.

The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is not intended to be legal or tax advice and is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett's products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

Traditional IRA contributions plus earnings, interest, dividends, and capital gains may compound tax-deferred until you withdraw them as retirement income. Amounts withdrawn from traditional IRA plans are generally included as taxable income in the year received and may be subject to 10% federal tax penalties if withdrawn prior to age 59½, unless an exception applies.

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