For the first time, defined contribution plan assets make up more than 30% of the nation's 1,000 largest retirement funds' coffers and more than a quarter of the top 200 plans' assets, according to Pensions & Investments' annual survey.
Overall, total holdings of the top 1,000 retirement plans rose 12.3% for the year ended Sept. 30, to $7.534 trillion. The top 200 plans' combined assets jumped 12.1% to $5.566 trillion.
There were no double-digit gains a year earlier: for the year ended Sept. 30, 2011, the top 1,000 grew 2.3% and the top 200, 1.7%. Employer contributions to the top 200 DB plans were up 3.9%, to $98.2 billion, and benefits paid rose 2.1% to $215 billion.
For the most recent survey, 30.4% of all assets in the top 1,000 plans and 25.4% of the top 200 were in defined contribution plans. The percentage growth in defined benefit assets among plans in the top 1,000, at 11.3% to $5.242 trillion, was almost four percentage points below that of DC plans, which rose 14.7% to $2.292 trillion.
Similarly, the percentage increase in DC assets among the top 200 plans, up 14.4% to $1.415 trillion, was higher than the 11.3% boost in top 200 DB assets, to $4.152 trillion.
While no one is predicting DC assets will overtake DB assets anytime soon, the growth in DC — both in total and as a percentage of total U.S. retirement fund assets — has been a consistent long-term trend. According to P&I survey data, total DC assets for the top 1,000 funds have grown 276% in the 20 years ended Sept. 30, and 230% for the top 200, compared with 159% for DB plans in the top 1000 and 163% for the top 200.
The largest U.S. retirement plan is a defined contribution plan — the Federal Retirement Thrift Savings Plan, Washington, with $325.68 billion in assets as of Sept. 30. The Thrift Savings Plan has had the most assets of any plan in the survey since it overtook the California Public Employees' Retirement System in 2009. Sacramento-based CalPERS ranks second in the latest survey, at $244.75 billion.
Rounding out the top five plans in terms of assets were the California State Teachers' Retirement System, West Sacramento, with $155.74 billion; the New York State Common Retirement Fund, Albany, $150.11 billion; and the Tallahassee-based Florida State Board of Administration, $134.35 billion.
The largest corporate plan in the survey was the $117.81 billion in assets of General Motors Co., Detroit, ranking seventh.
For the 12 months ended Sept. 30, the Russell 3000 index returned 30.17%; the Morgan Stanley (MS) Capital International All Country World index, 14.86%; and the Barclays U.S. Aggregate Bond index, 5.16%.
When adjusted for those market returns, however, total assets for the top 1,000 plans as of Sept. 30 were down 2.2% from 12 months earlier.
Defined benefit assets were down 2.9% and defined contribution assets were down 0.8%. For the top 200 plans, total assets were down a market-adjusted 2.3%, with DB assets down 2.7% and DC assets down 0.6%.
DC investment evolution
Although the DC growth trend remains the same, what has changed is how those assets have been invested.
From 20 years ago, when few investment options were offered and were primarily stable value and active equity, the number of investment strategies peaked in the late 1990s, only to decline through the 2000s to what's seen by most observers as a more manageable list of investment options for participants.
Among the top 200 defined contribution plans, the average number of options was 22 in the current survey, down from 24 in 2011.
Chief among those are target-date funds, in which the assets invested grew 28.8% for top 200 funds to $96.5 billion in the latest survey; inflation-protected securities, up 19.2% to $8.7 billion; and passive indexed strategies for equity (up 5.98% to $221.7 billion) and fixed income (a 10.9% gain to $47.8 billion).
“There's been a huge change in the composition of DC plans,” said Fredrik Axsater, managing director and head of global defined contribution investment strategies at State Street Global Advisors, Boston. “More people are enrolled, but also plan sponsors have taken steps to make investing easier.”
Added Kevin Crain, managing director and head of institutional retirement and benefit services for Bank of America Merrill Lynch, New York: “Target-date funds have been directly related to asset growth. They've made participants more comfortable with investing and didn't make them have to be investment managers.”
The boom in investment offerings in the late 1990s, intended increase diversification for participants, had an adverse affect on participation — and, subsequently, asset growth.
From 1995 to 2000, according to P&I data, DC assets as a percentage of total retirement assets hovered around 22%. “The complexity scared people, and then some of them got out entirely,” Mr. Crain said. “Indexed options were first introduced that were easier to understand, then target-date or asset allocation funds. The investment variety is still there, but participants aren't overwhelmed with the choices.”
Mr. Crain said DC assets also have increased because of more employer and employee contributions through automatic-enrollment and auto-escalation programs, and what he called “participant engagement,” including advice and education.
Mr. Axsater also cited the reduction in investment options and lower fees as drivers of asset growth.
However, Sue Walton, Chicago-based senior managing director at Towers Watson & Co., disagreed with the notion that participants are engaged. “That's just not true,” Ms. Walton said. “From what we've seen, the vast majority of participants have never changed their account allocation. That can be changed through plan design, fewer but more focused investment options and education.”
Ms. Walton said that going forward, defined contribution plans, particularly large ones, will continue to rely on target-date funds as investment options but also will offer customized investment options structured around target-date funds, making them more diversified and less expensive. For example, DC plans' investment committees could create their own target-date fund options including existing or new mutual funds or separate accounts from several money managers.
What won't be as prevalent, all agreed, will be the use of stable value funds in DC plans. In the latest survey, stable value as a DC asset class declined to 12% among defined contribution plans in the top 200 as of Sept. 30, from 14.7% in 2011. However, Ms. Walton said, they aren't going away. “Stable value continues to be a challenge,” she said. “They're not attractive options, but there's nothing to replace them with, so I think they'll continue to evolve.”
Mr. Axsater added: “Stable value will continue to have an important role in DC plans. There are polarizing opinions on this, and sponsors are questioning whether to have them as options. It's not a surprise to see some outflows from stable value, but I think plan sponsors still see them as an important option.”
For the remaining asset categories among DC plans in the top 200, domestic equity led with 37.6%, followed by cash at 17.2%; target-date funds, 11.6%; fixed income, 9.7%; international stock, 6.5%; inflation-protected securities, 0.5%; annuities, 0.1%; and the rest in other investments. While most asset classes remained relatively similar to their 2011 allocation, target-date saw the biggest jump, from 9.6% overall in 2011.
Still, Thomas Skrobe, managing director and head of the defined contribution distribution business at BlackRock (BLK) Inc. (BLK), New York, said the decline in stable value assets signals a strategic change by DC plan executives. “Larger plans are moving away from stable value, rethinking the low-risk component of their plans. That hasn't happened a lot in the past. They're finding there are alternatives to stable value,” by mapping to target-date funds and moving to unwrapped products, like indexed bonds.
Mr. Crain of Bank of America Merrill Lynch said much of those stable value assets, as well as those from money market options, are driving the gains in inflation-protected securities. “There's a little bit of cannibalization involved,” he said. “Plan sponsors are choosing to leave stable value and money market strategies for inflation-protected securities as the active protective fund in their plans. As sponsors go to market, there's still concern about stable value. Also, as markets get better, people are getting away from stable value. Still, stable value is getting looked at as a long-term investment option.”
Fixed income stagnant
Among defined benefit plans in the top 200, assets assigned to both U.S. active and passive equities saw substantial gains in the 12 months ended Sept. 30, as did direct hedge fund investments, while U.S. fixed income was relatively unchanged. Active domestic equity was up 10.8% to $368.6 billion, while passive domestic stocks rose 14.8% to $705.1 billion. Direct hedge fund investments rose 27.3% to $100.2 billion, and domestic fixed income was up 0.3% to $315.7 billion.
Overall, the average asset mix for DB plans in the top 200 was 27.6% U.S. equity, 24.7% domestic fixed income, 18.2% international equity, 9.4% private equity, 6.9% real estate equity, 4.7% alternative investments, 2.8% global equity, 2.3% cash, 2.1% global/international fixed income, and 1.3% other investments.
The biggest changes in the average allocation were international equity, which was down from 2011's 17.4%, and U.S. bonds, down from 26.6%.
The minuscule gain in domestic fixed income — up only 0.32% to $315.7 billion — could be tied to the derisking moves begun in 2012 by major corporate plans like GM and Ford Motor Co., Dearborn, Mich., said Russell Ivinjack, Chicago-based partner and chair of Hewitt EnnisKnupp Inc.'s U.S. investment committee. GM and Ford are both offering lump sums to some salaried retirees, and GM also will transfer $29 billion in pension assets to Prudential Financial Inc. to fund an annuitization plan. As of Sept. 30, Ford had $42.28 billion in DB assets, while GM had $101.91 billion. “The large settlements they made during the year mean they will use their long corporates to cash out for the annuities,” Mr. Ivinjack said. “While they're derisking, they're repositioning for the new liability. Insurers would like to see those bonds, actually, so they're actually transferring them.”
Joshua Levine, New York-based managing director and co-head of U.S. pensions for BlackRock (BLK), agreed that, from a strictly pension fund perspective, the transfer of assets is a bond sale. But “from a capital markets perspective, it's a wash,” since the insurers selling the annuities will use the cash to buy the same corporate bonds the pension funds sold to cash out their liabilities.
Mr. Levine said the minimal gain in fixed-income assets is more likely the result of pension fund executives wondering, “"How in the current (interest) rate environment are we going to get us to a 7% to 8% return. Where in the asset class is it safe to reach the yield? Where will it be a mistake to go?' There are lots of moves being done within fixed-income allocations but not out of them entirely.”
The rise in indexed bonds is a question of being nimble to take advantage of future interest rate increases, while the increase in passive equities is a fundamental shift, Mr. Levine said. “The question with equities is whether active has pulled its weight,” he said. “There are lots of questions among pension funds about whether active strategies have delivered.”
Mr. Ivinjack also said pension funds are aware of the challenges of active managers to add value, but he also said passive moves are tied to the derisking of DB plans. “Defined benefit plans don't have patience with active managers,” he said.
This article originally appeared in the February 4, 2013 print issue as, "DC snags a bigger piece of the pie".