Defined contribution assets of the Top 200 employee benefit plans swelled 17.3% to $429.2 billion for the year ended Sept. 30, reflecting the continuation of strong employee contributions and employer matches, increased participation in booming international equity markets, and better domestic equity returns.
On a market-adjusted basis, the assets of the largest plans only increased 7.2% from the $365.9 billion reported Sept. 30, 1992.
Observers said better domestic equity returns and a slight shift from GIC assets into equities helped the largest plans out of a comparatively dull growth period; in the year ended Sept. 30, 1992, growth for the Top 200 defined contribution plans was 0.4% in market-adjusted terms.
As bigger companies in the Top 200 improve the investment education offered to employees, defined contribution plan specialists expect a gradual increase in equity allocations, though no one expects an overnight surge out of fixed-income allocations too conservative to meet the retirement needs of most participants.
"Employers are still in the early stages of educating their employees about asset allocation. Participants are being made more knowledgeable about their 401(k) plans, but the element of trust still comes into play," said Leonard G. Carusi, director of retirement, for employee benefit consultants, Moyer & Ross Inc., New York.
"Employees need to trust their employers enough to believe them about the need for equity investment. Until this happens, we will continue to see disparity between the returns of the defined benefit plans run by professional managers, with a higher proportion of equities, and the returns of participant-directed defined contribution plans, which generally have 50% of assets and often much more invested in fixed-income products. We may have to accept the fact that the returns of defined contribution plans may never attain parity with defined benefit plans managed by professionals," he added.
Indeed, efforts to convince participants to adopt more aggressive asset allocations may be taking much longer than sponsors had expected, particularly among the smaller defined contribution plans represented in the Bottom 800 employee benefit plans in Pensions & Investments' rankings. Defined contribution assets for the Top 1,000 funds increased only 6.6% as of Sept. 30, to $610.1 billion from $572.3 billion the previous year, without market adjustment. On a marked-adjusted basis, the 1,000 largest plans experienced a drop in defined contribution assets of 2.6%.
Brian Ternoey, a principal at A. Foster Higgins & Co. Inc., Princeton, N.J., said it is "still early to see changes in the gross performance numbers for defined contribution plans. The phenomenon of investment education of any sort is still pretty new for plans of all sizes, but it is really a novelty among the smaller end of the plan size spectrum. There isn't a really high number of defined contribution plan sponsors with significant equity investments, especially at the low end. It's going to be a long-term process to effect the changes in participant behavior needed to allocate assets better."
Mr. Ternoey said at this stage in the evolution of defined contribution plan development, it was only possible to gauge the effects of intensified educational efforts by examining each plan individually to determine whether and where participants were redirecting their investments. "On a plan-by-plan basis, yes, there are some success stories out there, where participants are beginning to invest appropriately, with a better mix of equities factored into their allocations," he said.
He said 1993 was a year in which corporate downsizing continued at a heavy pace, resulting in many withdrawals from defined contribution plans as workforces shrank.
"My broad interpretation is that there was a lot of pressure in 1993 for withdrawals from 401(k) plans. There's no way to quantify the loss of defined contribution plan assets due to lump-sum distributions, but most of our clients tell us anecdotally that most terminated employees take the money and run. Early retirement incentive programs would be less of a problem, since assets are distributed monthly, rather than in a lump sum. My impression is that 1993 was about the same as 1992 for workforce reductions; not worse, but still not good," said Mr. Ternoey.
Defined contribution plan asset growth was strong this year for the three main types of plans: 401(k) plan assets for the Top 200 companies grew 15.4% to $99.8 billion, profit-sharing plans increased 23.6% to $23.6 billion, and thrift/savings plans swelled 69.6% to $81.9 billion.
The excellent return in many overseas markets, resulted in huge growth for the international investments of many of the large defined contribution plans. Overall, international assets for the largest defined contribution plans increased 88.5% without market adjustment, 49.4% when the market is taken into account.
With the Morgan Stanley Capital International Europe Australasia Far East Index returning 26.75% for the year ended Sept. 30, many sponsors with assets already invested internationally enjoyed stellar returns and increased asset allocations from participants attracted by the strong performance in the face of dwindling domestic fixed-income performance. International equity assets for the defined contribution plans among the Top 200 grew 73%, without market adjustments, and 36.4% when adjusted for market moves.
The Teachers Insurance and Annuity Association-College Retirement Equities Fund, at the top of the list of international defined contribution plan investors, increased international equity allocations to $10.197 billion, from $6.265 billion the previous year. Second place Bechtel Power pumped up its international equity investments to $573 million from $399 million. In all, eight sponsors added international investment options from participants in 1993, including Ford Motor Co., GTE Corp., Citicorp, U S WEST Inc., United Technologies Corp., Deere & Co., Shell Oil Co. and New York Life Insurance Co. A ninth fund also appeared among the ranks of international defined contribution investors, the New York City Teachers' Retirement System, which is reported separately for the first time this year.
International fixed-income investments also skyrocketed among defined contribution plan investors, albeit from a previously small base. International fixed-income assets grew a whopping 223.7%, without market adjustment, to $2.768 billion, from $855 million the year before. Even when the 14.9% return on the Salomon World Bond Index for the year ended Sept. 30 is taken into account, the increase is an astounding 182%.
Two plans added international bonds for the first time: U S WEST added a $2 million investment and New York Life added a $6 million investment.
American Airlines dropped out of international bonds, having held $14 million the prior year. TIAA-CREF topped the list of international fixed-income investors, with $1.688 billion. Bechtel Power Corp. also was in second place in this category, with $365 million allocated to foreign bonds.
Defined contribution plan sponsors appear to be taking an increasingly active role in investment management. Internally managed defined contribution assets increased 12.2% to $201.8 billion, from $179.9 billion a year earlier. Eleven plans listed internally managed assets for the first time in the survey, including Shell Oil, Ameritech, American Electric Power Service Corp., Citicorp, American Airlines, Colorado Public Employees' Retirement Association, Los Angeles County Employees Retirement Association and Westinghouse Electric Co.. Caterpillar Inc. increased internal management to $680 million in 1993 from just $36 million.
The average asset allocation of defined contribution plans for both the Top 200 and Top 1,000 companies show slight drops in GIC allocations and increases in other fixed-income categories and equities.
The average aggregate asset mix for defined contribution plans in the Top 200 companies showed an expected drop in GIC allocations to 23% from 28.7% in the previous year. The assets were reallocated to company stock, which rose 0.4 percentage points to 23.4%, and to other stock, which gained 1.4 percentage points to account for 21.6% of the aggregate allocation. Fixed-income assets gained 3.9 percentage points to total 18.3%. Annuities garnered 2.8% of the allocation, a rise of 2 percentage points from the previous year.
For the Top 1,000 companies, the average aggregate asset mix also showed a decreased GIC allocation, dropping 3.6 percentage points to 26.7% of defined contribution plan asset allocations. Company stock absorbed some of the reallocation, rising 2.2 percentage points to 23.4%, while other stock decreased 1.6 points to 21.7%. Fixed income also gained 1.4 percentage points, rising to 15.2%, while annuities increased by a modest 1.1 percentage points to 1.6%.
The 10 largest defined contribution plans continue to show strong growth from contributions and investment gains. Assets of the 10 largest funds grew 18.3% to $216.6 billion from $183.1 billion. TIAA-CREF continued its hold on the top spot, with $124.3 billion in assets, all of which is internally managed. TIAA-CREF's assets grew 14.9% from $108.2 billion the year before.
The Federal Retirement Thrift Investment Board was the No. 2 defined contribution plan in this year's P&I ranking, increasing 35.4% to $19.5 billion. American Telephone & Telegraph Co. took third place again, with $13.8 billion, an increase of 31.4%.