Pick a Lane

Back on June 12, we published a blog on how fee compression is impacting the retirement plan consulting industry and how firms within that industry are combating the compression.  Based on the emails I receive in my inbox, consulting firms have three primary objectives

  1. Attracting more clients
  2. Increasing margins
  3. Making engagements “stickier”

None of those three goals are objectionable.  We believe providing great value to clients, at a very minimum, makes it easier for us to attract clients and retain them for years.  Ultimately, the industry pieces that arrive in my email box seem more focused on approaches not directly tied to the quality and value of the work provided, but rather other “tools” firms can use to attain these goals.

In a retirement plan investment consulting capacity, our objective is to identify, recommend, review, and ultimately replace investment managers to fit the specific needs of our client portfolios. 

As of July 18, 2019, there are 7,688 unique open-ended mutual funds in the country and 26,338[1] if you include all the alternative share classes.  Add to that, thousands more separate account, collective trust, and variable annuity solutions, and rarely do we have difficulty finding adequate investment portfolios for participants to use.  So, it surprises me that so many firms in the investment consulting space have begun manufacturing target date products.  Thirty-nine investment firms provide target date products in the mutual fund and collective marketplace.  Of those 39 firms, several manage multiple target date products plan sponsors may utilize.[2]

According to a March 20, 2019 study by DCIIA[3], as much as 20% of the target date strategy marketplace may be custom products, most frequently manufactured by investment consulting firms.  What’s also interesting in the DCIIA study is that allocations to underlying asset classes in custom target-date funds are not in aggregate significantly different in construction than an over-the-counter target date product.  So why the growth in usage of custom target date solutions?   Consultants

The growth in target date utilization by participants is an undeniable phenomenon.  Over the next decade, if current behavior continues, target date investment products will be the overwhelmingly dominant asset held by defined contribution plans.  This is at the expense of other core and index investment options that consulting firms have made the bread and butter of their reporting packages. 

Consulting firms, scared at the diminishing value of their core investment analysis, have looked to balance their value propositions by building custom target date products as alternatives to any of the dozens of packaged products already available in the market.

Viewing it solely through the lens of an investment consulting firm, custom target date products check all the boxes…

  1. Attract more clients – Consulting firms can market the unique nature of their solution creating differentiation
  2. Increasing margins – Frequently consulting firms charge premiums for creating custom target date products
  3. Making engagements “stickier” – Once a consulting firm is dictating the construction of defaults, making a change becomes more challenging as changes will likely result in material investment strategy changes that impact participants

While the benefits to a consulting firm are clear and apparent, the benefits to a fiduciary are less clear.  Consultants manufacturing custom target date products must sacrifice some element of their objectivity when analyzing their performance relative other default options in the marketplace.  That objectivity is further stretched when the consulting firm earns fee premiums for manufacturing defaults. 

In short, if investment managers could objectively report on their performance, we’d be out of work.  The healthy tension between consultant and investment manager is a critical element of demonstrating fiduciary diligence.  Having consultants manufacture target date solutions may erode that review step, even if just a little.

That’s not to say that some sponsors may not benefit from having custom target date collectives or models built for their population.  The Department of Labor has addressed their desire to see plan sponsors evaluate the impact of custom solutions relative those that can be purchased from investment manages. 

But any thorough review of a custom target date solution should come with healthy skepticism as to what makes your population unique and who benefits if the fiduciary elects to build their solution.

Frequently, we’ve found that the organizations pushing for custom target date solutions are investment consulting firms trying to become something else … investment managers.  We think organizations have to “Pick a Lane,” and our lane is clear.


[1] Morningstar 2019 Target Date Fund Landscape

[2] Morningstar 2019 Target Date Fund Landscape

[3] https://cdn.ymaws.com/dciia.org/resource/resmgr/docs/dciia_ctdf_2018_survey.pdf

Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice. Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

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