Assets of the 1,000 largest U.S. employee benefit plans grew only modestly during the year ended Sept. 30, climbing 2.2% to $2.725 trillion in a year of relatively flat and negative returns in domestic and overseas markets.
Defined contribution plans among Pensions & Investments' survey of the 1,000 largest employee benefit plans grew 7.7% in the 12 months, to $657 billion. Defined benefit plan assets of the top 1,000 grew just 1.6% to $2.054 trillion. In the previous year's survey, defined benefit plan assets rose 11.6%, compared with 6.7% for defined contribution plans, reflecting double-digit domestic and international market returns.
After adjusting for market-related growth, defined benefit assets held by the 1,000 largest employee benefit plans grew a tiny 0.38%, while assets of defined contribution plans rose 6.2%. The top 200 pension funds - which account for more than 75% of the total assets of the 1,000 largest funds - rose just 1.8% to $2.07 trillion. After adjusting for market growth, assets of the top 200 defined benefit plans rose 0.75%; assets held by defined contribution plans in the top 200 grew 4.3% on a market-adjusted basis.
Indexes used as benchmarks for the performance of domestic equity and fixed-income markets explain much of the reasons for this year's only modest growth.
The Standard & Poor's 500 Stock Index grew only 3.69% in the 12 months ended Sept. 30. The Salomon Broad Bond Index returned -3.2% for the same period. By comparison, the S&P 500 returned 13% for the year ended Sept. 30, 1993; the Salomon Broad index return was 10.17%.
Consultants attribute the flat, market-adjusted growth of defined benefit plans to poor domestic market performance.
Defined contribution plans in the top 200 and top 1,000 rankings are beginning to show the benefits of the increasing sophistication in the way such plans are administered by sponsors and in the investment savvy of the individual plan participants making asset allocations in their retirement accounts, said Mark E. Ahern, senior consultant at SEI Capital Resources, Wayne, Pa.
"The institutionalization of the defined contribution plan market has improved performance with better managers, with more treasury department input into investment choices for the plan, and a move away from one-stop shops. Plans are offering the best funds in the various and increasingly sophisticated asset classes they are now offering, rather than funds from a single family that might have mixed performance levels," Mr. Ahern said.
"Employees in the top 200 are likely to have had more educational training from their employers and, hence, more diversified asset allocations. And the larger employers may also be offering more lucrative matching contributions," said Mr. Ahern.
The comparatively stellar performance of the international equity markets has continued to attract both defined benefit and defined contribution plan assets.
International assets of the top 200 employee benefit plans grew 30.6% in the year ended Sept. 30, rising to $187.2 billion. International assets now represent 9% of the total assets of the top 200 plans.
The Morgan Stanley Capital International Europe Australasia Far East Index returned 10.12% for the year ended Sept. 30. The Salomon World Bond Index, however, fell 2.59% for the same period (See related story on page 23).
Defined benefit plan assets of the top 200 funds invested in international equities rose 32.7% to $130.8 billion, compared with $98.6 billion a year earlier. On a market-adjusted basis, top 200 international equity assets grew 20.6%.
One reason for the growth in international equity is defined contribution plans, whose investments in foreign stocks grew 34% to $18.1 billion in the year ended Sept. 30. On a market-adjusted basis, international equity assets held by the top 200 defined contribution plans grew 21.7%.
Consultants say the surge in active international management may account for the drop in domestic passive equity and fixed-income investment by the top 200 defined benefit plans.
"Plan sponsors understand that domestic indexing is a useful tool and the prices are good, with razor-thin fees," said SEI's Mr. Ahern. "But as plan sponsors move to international investing, the overwhelming majority select active international management. Funding for international investment is following a general trend that moves assets from indexed domestic asset classes to active international asset classes."
The Arizona State Retirement System in Phoenix, for example, reduced its domestic indexed equity assets 64% and domestic indexed fixed-income assets by 56%, and increased its international equity investments 41%.
Indexed assets fell 4.8% for the combined top 200 defined benefit and defined contribution plans to $390.9 billion from $410.8 billion in 1993. Top 200 defined benefit plans reduced their indexed equity assets 5.5% to $250 billion, an 8.9% drop on a market-adjusted basis. Large defined benefit plans dropped indexed fixed income even further, with a 13.8% drop to $76.8 billion, or a market-adjusted drop of 11%.
Defined contribution plans, on the other hand, increased indexed assets.
Defined contribution plans within the 200 largest employee benefit plans invested $60.2 billion in indexed equities as of Sept. 30, a 10.5% increase. On a market-adjusted basis, top 200 defined contribution indexed equity assets grew 6.5%. Indexed bond funds experienced huge asset growth among top 200 defined contribution plan investors, albeit from a small base. Indexed bonds among that group grew 44.4% to $3.9 billion or 47.3% on a market-adjusted basis.
"I think we're seeing the beginning of a trend here," said Mr. Ahern. "As defined contribution plans get bigger and more professionally run, they begin to look more like defined benefit plans, and hence, indexing will play a larger role. DC plan sponsors have been less likely to offer indexed options to plan participants than defined benefit plan counterparts, but that is changing."
The dissolving of the investment management departments of several large defined benefit plan sponsors in 1993 and 1994 contributed to a decline in the amount of assets managed in-house.
Among the largest 200 plans, internally managed defined benefit assets dropped 2.3% to $647.1 billion, from $662.6 million. Equity internal management by the top 200 defined benefit plans rose 6%, as fixed income managed in-house dropped 3.7%.
"It makes sense that the pools of internally managed assets are fewer and smaller. For different reasons, big plan sponsors are looking very hard at their internal management activities. There have been huge cost pressures on managers for core, plain vanilla management and sponsors have been the winners. The need to internally manage assets to save money over outside manager fees is diminishing," said Mr. Ahern.
Monica Butler, client executive in the U.S. consulting group of Frank Russell Trust Co., Tacoma, Wash., noted the reduction or elimination of just a few of the very large internal investment management departments was enough to affect the overall amount of assets managed in-house. IBM Corp., Caterpillar Inc., Sears, Roebuck and Co. and Shell Oil Co. all eliminated or significantly reduced internal management activities (P&I, Sept. 19).
In addition, American Telephone & Telegraph Co., Connecticut Trust Funds, Evangelical Lutheran Church in America Board of Pensions, Florida State Board of Administration, ITT Corp., Los Angeles Fire & Police Pension System, New York City Teachers Retirement System and Pacific Telesis Group all reduced their internally managed assets, according to their data for the P&I survey.
Several alternative investment classes showed decline, primarily because of what SEI's Mr. Ahern said was a move "back to the basics."
"Plan sponsors are examining alternative investments, driven by their board of trustees, who in turn have been concerned about the problems at places like Orange County. Consultants have been seeing sponsors work to remove all the smoke and mirrors to get back to asset classes in which there is a more symmetrical risk-return pattern," he said.
"Plan sponsors are beginning to look at their alternative investments very carefully and are moving to avoid investments where enormously risky downside potential simply isn't justified by relatively incremental, minor upside potential. Potential upside reward is being balanced back to downside risk much more carefully than in past years."
For example, assets in mortgage-backed securities among the top 200 employee benefit plans dropped 5.8%. Mortgage investments dipped 25.3% for top 200 plan sponsors overall.
Other highlights of the survey data collected as of Sept. 30 include:
Real estate equity assets rose 4% for top 200 defined benefit plan sponsors to $49 billion. Frank Russell's Ms. Butler said because real estate performance in 1994 was closer than it has been to other asset classes, plan sponsors are beginning to consider a move back up to their target portfolio allocations.
GIC and BIC investments grew 3.9% for the top 200 funds to $53.1 billion. Growth in defined contribution plan assets invested in GICs was minor at 1%, suggesting plan participants might be diversifying their accounts into other investment choices.
Overall, defined benefit plan and defined contribution plan contributions by the top 200 funds rose 8.7% to $50 billion, up from $46 billion the previous year. Defined benefit plan contributions rose to $40.6 billion, a 10% increase from the previous survey's $36.9 billion. Defined contribution plan employers in the top 200 increased 3.3% to $9.4 billion the contributions made to plans. As of Sept. 30, 1993, defined contribution plan sponsors contributed $9.1 billion.
