Goldman Sachs Group Inc., fighting a lawsuit from U.S. regulators who accuse it of misleading investors, is trying to convince more Americans that they can trust the firm with their retirement funds.
Goldman is promoting alternative asset funds and designing target-date funds that provide guaranteed income to grab a bigger piece of the $2.7 trillion 401(k) market, said Bill McDermott, a managing director at Goldman Sachs Asset Management and head of its defined contribution business.
"We understand risk and we understand asset allocation," said McDermott, who joined the firm in February to strengthen its retirement plan products and marketing. "We're looking to leverage that for the 401(k) market."
Goldman's 401(k) plan assets totaled $17.5 billion at March 31, according to the company. By comparison, Fidelity Investments, the largest 401(k) asset manager, had $347.8 billion at Dec. 31. Assets in 401(k) plans are projected to increase 41%, to $3.8 trillion, by the end of 2014, according to data from Cerulli Associates in Boston.
Goldman and BlackRock Inc., the world's largest asset manager, do not administer retirement plans and have been seeking more 401(k) business. The sector has been dominated by firms such as Fidelity, of Boston, and Vanguard Group in Valley Forge, Pa., which administer plans as well as manage assets.
"A lot of investment-only managers are trying to get in," said Lori Lucas, who leads the defined contribution practice at Callan Associates, a San Francisco investment consulting firm. "They see the writing on the wall" as traditional pensions are replaced by 401(k) plans.
The lawsuit the Securities and Exchange Commission filed against Goldman on April 16 alleges it misled investors in a mortgage-linked investment. Goldman denies the allegations and said it will fight them. A Senate panel grilled executives, including Chief Executive Officer Lloyd Blankfein, on April 27 about the case.
"Having issues certainly isn't going to help. But all the signs so far are telling us that clients are sitting tight," said Teresa Epperson, a partner at Mercatus, a Boston financial consulting firm. "Goldman's capabilities are in trading strategies and hedging risks. The extension of those absolute-return strategies could be attractive to plan sponsors."
The asset management division that McDermott works in is separate from the mortgage unit that sold the securities at the center of the SEC's fraud suit against Goldman. A key difference between the two businesses is that the asset management division operates under a fiduciary duty to its clients, whereas the sales and trading division does not.
"When a client gives us their money and their assets to manage, we are 100% their fiduciary, we must manage their money in the most prudent fashion possible using our best judgment possible," Goldman President Gary Cohn said May 11 at an investor conference in New York. "The rest of Goldman Sachs is not in the fiduciary business."
Goldman's total assets under management at March 31 were $840 billion, down 4% from the end of the fourth quarter, primarily because of outflows in money market funds, according to the company's first-quarter earnings release.
Asset management is a smaller department at Goldman than investment banking or trading, accounting for 8.8% of the firm's 2009 revenue of $45.2 billion.
Alternative assets, such as commodities and real estate, can increase a portfolio's overall return and lower risk. They're gaining in 401(k) plans because more companies are creating their own custom target-date funds, Lucas said.
Target-date funds move money from riskier investments such as stocks to more conservative alternatives like bonds as an investor approaches retirement.
The market drop of 2008, when the Standard & Poor's 500 index declined 38%, showed that "there were very, very, very few safe havens," said Bud Pernoll, senior managing director of Bay Mutual Financial LLC in Santa Monica, Calif., which advises corporate retirement plans on their investment options and works with Goldman. "You're starting to see plan sponsors look outside the traditional asset classes."
Since the start of the year Pernoll has added Goldman's Satellite Strategies Portfolio, a mutual fund with a portfolio of other mutual funds invested in assets such as real estate, commodities and emerging markets, to more than a dozen 401(k) plans he advises. The fund, with $585 million of assets, returned 28.6% in the past 12 months, according to data compiled by Bloomberg News.
Goldman already has sold its funds to the 401(k) plans of such companies as Intel Corp., Sun Microsystems Inc. and Sysco Corp., according to data compiled by BrightScope Inc., a San Diego 401(k) research firm.
The most popular Goldman funds for 401(k) plans are the Goldman Sachs Mid-Cap Value Fund and the Goldman Sachs Small-Cap Value Fund, according to BrightScope. The midcap fund returned 42.9% for the past 12 months, and the small-cap fund returned 45.2% in the same period, according to data compiled by Bloomberg.
Goldman is developing target-date offerings that include guaranteed income during retirement, McDermott said. That puts it in competition with BlackRock and AllianceBernstein LP, the money management unit of Axa Group, in developing target-date funds that include annuities.
"There's a lot of interest in product development, but not a lot of plan-sponsor usage," Callan's Lucas said. That may be because big corporate plan sponsors are waiting for guidance from regulators.
The Department of Labor has been studying annuities in retirement plans, and the Senate's Special Committee on Aging is scheduled to hold hearings on lifetime income June 16.
"We want to be a major player," said McDermott, who previously worked in the corporate retirement divisions of Axa Equitable and Fidelity. He said he expects to increase the number of people on his team to 30 from 20 by yearend.
Goldman's alternative asset push "is ahead of the curve right now, so they see an opportunity to dominate that niche," said Steven Dimitriou, managing partner of Mayflower Advisors LLC, a Boston retirement plan consultant.
"As soon as these funds start gaining traction, they're going to get copycatted."