DC assets jump 17%, more than double DB growth

Market, organic growth help to power boost; top 1,000 funds surpass $8.3 trillion mark

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Mark Ruloff said corporate plans are more likely to derisk because of concerns about funding.

Defined contribution assets among the nation's largest 1,000 retirement plans grew 16.93% in the year ended Sept. 30, more than two times the 8.11% rate of defined benefit assets.

The growth of DC assets among the largest 200 plans was almost as rapid — 13.68% — compared with 7.33% for the DB plans in the top 200, Pensions & Investments' annual survey found.

Total assets of the top 1,000 retirement plans rose 10.8% for the year ended Sept. 30, to $8.35 trillion. The top 200 plans' combined assets jumped 9% to $6.06 trillion.

For the most recent survey, 32.1% of all assets in the top 1,000 plans and 26.5% of the top 200 were in defined contribution plans.

“There continues to be heightened attention being placed on these DC plans,” Sabrina Bailey, Seattle-based principal and U.S. defined contribution segment leader at consulting firm Mercer LLC, said in a telephone interview. “DC plans are becoming the key retirement vehicle for participants in the U.S.” Although much of the growth in DC assets is being attributed to market growth, Ms. Bailey said assets in the sector have been growing organically.

Rankings unchanged

Rankings of the five largest retirement plans were unchanged from a year earlier: The Federal Retirement Thrift Savings Plan, Washington, with $375.09 billion, all defined contribution assets, is first. That plan has been top-ranked since 2009, when it overtook the California Public Employees' Retirement System. Sacramento-based CalPERS ranks second overall in the latest survey, at $273.07 billion, and at the top of the defined benefit plan ranking, with $271.45 billion in DB assets, as of Sept. 30. Rounding out the top five: the California State Teachers' Retirement System, West Sacramento, with $172.42 billion; New York State Common Retirement Fund, Albany, $164.01 billion; and Tallahassee-based Florida State Board of Administration, $146.27 billion. The largest corporate plan in the survey was Boeing Co., Chicago, ranking eighth overall with $98.92 billion in retirement assets as of Sept. 30. Of that amount, Boeing had about $56.6 billion in defined benefit assets and about $42.3 billion in defined contribution assets. The largest union plan, the $35.52 billion Western Conference of Teamsters Pension Trust, Seattle, ranked 43rd.

DC plans are continuing to see a healthy increase in assets in part because more corporate plan sponsors are freezing or terminating their DB plans and becoming more proactive in getting participants into DC programs through increased auto enrollment and auto escalation. “We saw a bigger push historically to DC as a primary retirement vehicle as plan sponsors have made a move away from DB,” said Sue Walton, senior investment consultant at Towers Watson & Co., Chicago. Equities helped boost assets across the board, with the Russell 3000 gaining 21.61% in the survey period, and despite the trend of portfolio derisking and liability-driven investment, domestic fixed-income assets by P&I survey respondents were down. The survey shows DB plans in the top 200 had an aggregate weighting of 22.6% to U.S. fixed income, down from 24.7% as of Sept. 30, 2012, and 26.6% as of Sept. 30, 2011. The divergence in the domestic fixed-income holdings between corporate and public DB plans continued. As of Sept. 30, corporate plans in the top 200 reported 32.4% in domestic fixed income, down from 33.7% a year earlier and 36.5% as of Sept. 30, 2011. Public funds also decreased in the most recent survey, dropping to 20.8% from 22.6% and 24.1% in the previous two surveys, respectively. Because of improved funding ratios, many corporate plans are generally looking at LDI, which is up 10% to $73.7 billion, while active domestic bonds are down nearly 6% to $565.7 billion. Meanwhile, “public plans don't have the same high hurdles to funding and therefore don't have the same incentives to derisk that corporate plans do,” said Mark Ruloff, director of asset allocation at Towers Watson in Washington. As a means of diversifying their portfolios and reducing risk, a number of corporate DB plans are moving into alternatives and smarter beta, which has a lower volatility than their current equity portfolio, Mr. Ruloff said. This not only helps the plans diversify, but also enables them to pay less in fees, he noted. Some corporate plans that are not following an LDI approach and are going more into alternatives, but that's more of a tactical decision, he said. The remainder of the DB plan asset mix among the top 200 was 28.1% U.S. equities, 19.3% international equities, 8.9% private equity, 7.3% real estate, 5.2% alternatives, 3.3% global equities, 2.1% global/international fixed income, 1.7% cash and 1.5% other strategies. For DC plans among the top 200, the aggregate asset mix was 39.6% U.S. equities, 17.1% cash, 13.7% target-date funds, 11.5% stable value, 7% fixed income, 7% international equities, 3.5% other strategies, 0.4% inflation protection and 0.2% in annuities. “Those in equities have enjoyed good returns in 2013. Target-date funds have also done well,” said Martha Tejera, president of consultant Tejera & Associates LLC, Seattle.

A healthy rise

Indeed, within the top 200 defined contribution plans, target-date strategies saw a very healthy rise, reaching $122.2 billion in the year ended Sept. 30, up 26.6% from the same period the year before.

“Interest rates have produced losses in the fixed-income markets,” said Mr. Ruloff. “Those that had large allocations to equities did well this year.”

With many DC plans having more “opt-out” functions than “opt-in,” and with plan executives taking advantage of participant inertia through auto enrollment, Ms. Walton noted the industry can expect defined contribution assets to continue to increase at a healthy rate.

“The next thing that will happen is, if interest rates go up, we'll see a lot of DB plans terminating,” Ms. Tejera added. “A lot of DB plans are freezing, so they're just waiting for a point in time to terminate the plan.”

Among other survey findings:

  • Of the top 200 funds' defined benefit assets, $987.7 billion was internally managed, up 6% from a year earlier. Of that, nine pension plans reported a combined $35.7 billion managed internally in alternatives. This was the first year respondents were asked about internally managed alternatives.
  • Also for the first time in this survey, P&I asked DB plan sponsors to break down the type in investment vehicles in which they invest. Not surprisingly, the majority (72%) use separate accounts, while more than a quarter (27%) go through commingled investments. Mutual funds and exchange-traded funds each account for less than 0.5%.
  • Employer contributions to DB plans in the top 200 were up 3.4%, to $101.5 billion, and benefits paid rose 3.8% to $223.2 billion.
  • The majority of top 200 assets as of Sept. 30 were in public funds (52%). Assets in corporate plans accounted for 36% of the top 200; miscellaneous, 10%; and union, 2%.

  • DC plans in the top 200 reported declines in their assets invested in inflation-protected securities and commodities, down 20.7% to $6.9 billion, and 12.5%, to $700 million, respectively, over the survey period.
  • DB plans in the top 200 also decreased commodities, down 6% to $23.2 billion, while increasing slightly their inflation-protected securities holdings, up 1.6% to $71.4 billion.

This article originally appeared in the February 3, 2014 print issue as, "DC assets jump 17%, more than double DB growth".