The never-ending fight for lower
fees and the fear of fee-related lawsuits have pushed passive investments ahead
of active management among large defined contribution plans in 2015 - the first
time since Pensions & Investments began tracking data from the 100 biggest
Among companies identifying management
styles, the study found passive management accounted for 51.8% of assets in
2015, while 48.2% were actively managed. That's a flip from 2014, when active
management accounted for 51.5% and passive, 48.5%. In 2013, the active to
passive split was 54.7% and 45.3%.
Pensions & Investments analyzed
data since 2013 covering U.S.-based companies, both public and private, but
excluding mutual companies. Separate company DC plans in Puerto Rico are
excluded. The latest data is based on companies' filings with the Securities and
Exchange Commission and Department of Labor, primarily for 2015 plan years.
It was also found that collective
investment trusts took a bigger piece of the asset-allocation pie, as DC
consultants noted that fees are sparking plan executives' interest in CITs at
the expense of mutual funds.
The growth in passively managed
assets and CITs occurred as total DC assets slipped by less than 1% to $1.118
trillion in 2015 from $1.128 trillion in 2014.
“It's not a surprise due to all
of the litigation,” said consultant Jennifer Flodin, referring to greater
allocations to passively managed investments. She was referring to lawsuits
accusing plan sponsors of breaching their fiduciary duties by not using or
considering lower-cost investment options.
In their investment lineups,
“sponsors have been offering a passive sleeve to give more choice,” said Ms.
Flodin, the Chicago-based managing director and co-DC practice leader for
Pavilion Advisory Group Inc.
Plans have added passively
managed investments because “there's been a greater scrutiny on fees and more
interest,” said Winfield Evens, a partner at Aon Hewitt Associates,
Lincolnshire, Ill. “In our view, there's a role for both. No matter what you
are using, pay attention to fees.”
The DC research landscape is
filled with surveys showing how lower fees over time affect record keeping and
investment management. However, DC plans aren't the only arena for combat over
fees. Some public pension plans are eliminating or reducing exposure to hedge
funds because executives believe the fees are too high and the returns are too
low. In the U.K., money managers are cutting fees as they try to retain local
government pension-scheme clients that are consolidating.
CITs Continue to Rise
Among companies identifying
investment vehicles, collective investment trusts rose again, grabbing 56.7% of
assets in 2015 vs. 54.3% in 2014 and 50.3% in 2013. Mutual funds accounted for
33.2% of assets, down from 35%, while separate accounts represented 10% of
assets, slipping from 10.6% in 2014. In 2013, mutual funds had 36.5% of the
assets and separate accounts, 10.9%.
“This is in line with what we see
among our clients,” said Mr. Evens. Companies' motivations for offering CITs
include offering investment options that can be less expensive - though not
always - than mutual funds and a greater interest in passively managed
investments. “Passive is a big driver in collective investment trusts,” Mr.
Among Aon Hewitt's record-keeping
clients, which tend to be larger DC plans, 39% of DC assets were in CITs by the
end of 2016 vs. 14% in mutual funds and 47% in separate accounts. The latter
includes multiple subadvisers combined into a single investment option for
participants, company stock funds and the hiring of an asset manager to employ
a strategy for a specific asset class.
Collective investment trusts will
secure more DC plan assets as the CIT providers offer more products and as they
reduce the minimums required by plans to participate in CITs, said Jeri Savage,
the partner in charge of defined contribution research at Rocaton Investment
Advisors, Norwalk, Conn. “Years ago, you had to be a $1 billion plan,” she
said. “Now, you can be a $100 million plan.”
Ms. Savage and other industry
members said target-date funds will take ever-greater allocations among 401(k)
plans. The explosive popularity of target-date funds as qualified default
investment alternatives, auto enrollment and participants' desire for a
“do-it-for-me” approach to investing all have contributed to the funds' growth.
Before the Pension Protection Act
of 2006, “sponsors were reluctant to use multiasset funds,” said Mr. Evens,
referring to the increase in target-date fund allocations. In Aon Hewitt's
quarterly survey of 401(k) plans with a total of $160 billion in assets,
target-date funds accounted for 24.1% of total assets by year-end 2016 vs.
23.1% at the end of 2015.
In a broader survey of the top
100 DC plans showed target-date funds securing $120 billion, or 10.7% of assets
in 2015 vs. 9.5%, or $106.6 billion, in 2014. In 2013, target-date funds' share
of total assets was $87.8 billion, or 8.2%. Target-date funds represented the
third-largest asset group in 2015.
Target-date funds “continue to
grow, driven in most part by plan design strategies to get investors in the
right place,” said Sue Walton, a Chicago-based senior vice president of defined
contribution for Capital Group. Auto enrollment, auto escalation and
re-enrollment all contribute to target-date funds' greater popularity, she
Other Prominent Categories
Among other prominent asset
categories in Pensions & Investment's data analysis:
- The largest allocation was to domestic equity,
which accounted for $319.17 billion, 28.6%, in 2015, vs. $334.12 billion
(29.6%) in 2014 and $321.57 billion, or 30.1%, in 2013.
- Company stock slipped to $200.55 billion in
2015, or 18% of total assets, the next largest allocation. Company stock
represented 19% of assets in 2014 and 19.4% in 2013.
- Allocations to stable value accounted for 9.7%
of total assets in 2015 vs. 9.4% in 2014. With 2015 assets of $108.9 billion,
stable value was the fourth largest asset category.
- Fixed income fell to 8.4% of total assets in
2015 from 9.2% in 2014.
- Brokerage windows and alternative investments
remained tiny components. The former accounted for 2.6% of all assets in 2015
and 2.5% in 2014. The latter represented $1.8% in 2015 and 1.8% in 2014.
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