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Defined Contribution

Managers of defined contribution benefits regain steam in 2016

Assets reach a record, climbing 8% to $5.9 trillion, a year after slight slump

Anne Ackerley
BlackRock's Anne Ackerley pointed to explosive growth in passive management and robust markets as big reasons for the increase in target-date funds.

Defined contribution money managers posted record assets under management last year of $5.95 trillion, up 8.6% from 2015, according to the latest survey of money managers by Pensions & Investments.

DC plan assets managed internally by the managers rose to $5.25 trillion, an increase of 9.5%. Both the total AUM and the internal AUM resumed their upward path after having dipped in 2015 vs. 2014 — total AUM had dropped 1%, and internally managed AUM had declined 0.8%.

Among individual managers, the year-end 2016 data show that the more things change, the more they stay the same. Most of the largest DC money managers gained AUM, and most rankings of major players stayed the same vs. 2015.

DC consultants said money managers that gained the most did so thanks to their arsenals of passively managed funds, which have become attractive to sponsors in search of lower-cost alternatives to actively managed investments. Target-date funds also boosted AUM among money managers.

“The largest passive managers have seen large increases in (dollar) flows,” said David O'Meara, a New York-based senior investment consultant for Willis Towers Watson PLC. Among DC plans, “a greater focus on fees” is pushing sponsors toward adding passive investments.

It's been a “hard environment for active managers to only compete on performance,” said Mr. O'Meara, adding plan executives have limited patience for firms that produced negative or below-benchmark results. “Investment committees have a short leash on active managers.”

Vanguard leads charge

Leading the charge in 2016 is Vanguard Group Inc., Malvern, Pa., which enjoyed a 22.8% increase in total assets from U.S. institutional defined contribution clients to $903.6 billion.

“There's been an increasing awareness and concern about fees,” said Kathryn Himsworth, a principal and head of institutional record keeping in the Vanguard institutional investor group, describing why Vanguard's index business is growing.

“There's been a continued acceleration in target-date funds, said Ms. Himsworth, adding that last year target-date funds accounted for six of every $10 that came into Vanguard's retirement business.

Target-date funds and passively managed investments propelled BlackRock (BLK) Inc. (BLK)'s DC AUM last year to $692.3 billion in 2016 — up 13.8% from 2015.

Target-date fund growth occurred primarily among index-based target-date funds, said Anne Ackerley, the New York-based managing director and head of U.S. and Canada defined contribution for BlackRock. “There's been very nice growth in stand-alone index funds.”

Ms. Ackerley said BlackRock's index-related investments have done well in recent years thanks to strong stock market returns, which have been “pretty robust,” especially in domestic equity, and to the low costsof index funds.

Custom target-date funds will be a source of future growth as sponsors ask “is there something I can do to get a better outcome,” she predicted. The key to custom target-date success will be designing products that take into account a sponsor's unique workforce characteristics, such as demographics and employee retirement patterns.

BlackRock's 2016 performance put more daylight between the company and third-place Fidelity Investments, Boston, which had DC AUM of $620.2 billion.

In 2015, BlackRock moved to second from third, squeezing past Fidelity. Last year, the gap widened as BlackRock's 13.8% AUM growth outpaced Fidelity's AUM gain of 2.2%.

In addition to Vanguard and BlackRock, DC consultants said beneficiaries of greater sponsor interest in index-based investments included State Street Global Advisors, Boston, whose DC AUM rose 15.1% in 2016, and Northern Trust Asset Management, Chicago, whose DC AUM gained 16.4% last year.

“Passive management is gaining momentum,” said Martha Tejera, project leader of DC consulting firm Tejera & Associates, Seattle. “Research shows it's hard for active managers to outperform benchmarks.”

Sponsors' perception of litigation risk due to suits claiming excessive fees has affected their investment choices, she added. Money managers that capitalize on sponsors' increasing interest in white label funds also should benefit from increased business as they subadvise investment lineups, she said.

“There's been a large turn toward passive,” said Matthew Porter, the Chicago-based principal and director of research analytics at DiMeo Schneider & Associates. Passive investments are often cheaper and, in recent years, many have outperformed their active investment peers, he said.

Fears of ERISA litigation also prompt sponsors' actions, he added. “Sponsors want to have lower-cost options,” even though the Department of Labor doesn't require plans to offer the lowest-price investments, he said. “Plans want to give participants a choice between active and passive.”

PIMCO declines

Among the top 15 DC money managers, only Pacific Investment Management Co. LLC, Newport Beach, Calif., recorded a lower AUM last year vs. 2015 — a decline of 6.3% to $102 billion.

Between 2015 and 2014, DC AUM for PIMCO plunged 29%, which consultants attributed primarily to the turmoil involving the resignations of Mohammed El-Erian, the CEO and co-chief investment officer, and of William H. Gross, a company co-founder and co-CIO.

“Strong performance across many of our strategies especially after interest rates began to rise in the middle of last year helped drive net inflows firmwide for three consecutive quarters with the January through March period experiencing the largest inflows in four years,” a spokeswoman said in an emailed statement of the firm's overall performance. She declined to comment on PIMCO's 2016 DC performance.

The firm's declining AUM last year “could have been a hangover from Bill Gross and Mohammed el-Erian,” said DiMeo Schneider's Mr. Porter, noting PIMCO also could have been affected by its emphasis on active management. “We believe active management is the right move for fixed income,” he added. “We like PIMCO.”

The overall trend among plans to favor passive over active management “will change when active outperforms passive,” Mr. Porter said. In the past six to nine months, active managers have made gains vs. their benchmarks in fixed income as well as in domestic equity, international equity and emerging markets equity, he said. However, for three-, five- and seven-year returns, “most active managers are behind,” he added.

This article originally appeared in the May 29, 2017 print issue as, "DC managers regain steam in 2016".