Defined contribution assets grew 23% among the top 25 money managers in 1996, according to Pensions & Investments' directory of defined contribution money managers.
The top 25 managers were responsible for investing more than 80% of the $1.2 trillion internally managed defined contribution assets reported at the end of 1996. As of Dec. 31, the top 25 managers with the largest internally managed defined contribution portfolios had more than $971 billion under management compared with the $789.1 billion reported the previous year by the top 25.
The growing popularity of index funds resulted in some changes among the largest defined contribution asset managers.
And 401(k) plans still hold the most in defined contribution assets, accounting for 55% of those assets held by the 195 managers reporting as of Dec. 31.
The top 10 largest defined contribution asset managers remained relatively constant from last year's results, but there were some noticeable shifts in position.
The three largest managers in 1997 are the same as last year. The Teachers Insurance and Annuity Association - College Retirement Equities Fund, New York, held on to the top spot with $185.3 billion. Fidelity Investments, Boston, was second with $155.4 billion, and State Street Global Advisors, Boston, remained in third with $58.5 billion in internally managed defined contribution assets.
But the rest of the top 10 shifted noticeably from a year ago.
Merrill Lynch, Plainsboro, N.J., moved up to fourth, with $49 billion under management, up from eighth a year ago. Vanguard Group of Investment Cos., Malvern, Pa., moved to fifth place from sixth, with $46.8 billion. Barclays Global Investors, San Francisco, moved to sixth from seventh with $42.5 billion, and Bankers Trust Co., New York, moved into ninth with $33 billion from 10th last year.
Each of the defined contribution asset managers who moved up among the top 10 has strong indexed investment vehicles, which have been gaining favor in participant-directed defined contribution plans in recent months.
"Look at the attributes and the strengths of each (of the managers who moved up). Each is very strong in indexing," said Gary Blank, president of Gary Blank Retirement Consulting, a San Francisco defined contribution consultant. "I expect that very soon the Vanguard Index Trust 500 Portfolio will be larger than Fidelity Magellan."
Bill McNabb, senior vice president-institutional at Vanguard, acknowledged the growth in the S&P 500 fund represented a "decent sized piece of the growth" at Vanguard during the last year. The fund now totals more than $43 billion, up from $17.3 billion at the end of 1995 and $30.5 billion at the end of 1996. Of that $43 billion, about $14.2 billion is from defined contribution plans.
According to a survey by Buck Consultants, New York, index funds held an average of 15% of defined contribution equity assets and 9% of fixed-income funds.
Tim Murphy, defined contribution consultant at Hewitt Associates, Chicago, said the popularity of indexing contributed to the growth among the largest defined contribution managers.
"I don't really think it is a wholesale move away from active to passive management," said Mr. Murphy. "It is more a move to more investment options. Usually, when plans offer more options they look to offer both active and passive options within an asset class."
The 10 largest defined contribution managers overall handled 56% of the total defined contribution assets reported. The top five mutual fund companies and independent managers directed the investment of 39% of the assets and the top five banks managed 13% of the defined contribution assets as of Dec. 31.
Among those firms that provided a break-out of their assets by type of plan, 401(k) plan assets represented the largest portion of defined contribution assets with 55%. The second largest source of defined contribution assets for managers was 403(b) plans, which accounted for 26% of the total; only 3.7% of defined contribution assets reported by the managers were in section 457 plans.
Last year's anticipated push by traditional institutional investment counselors, those primarily associated with the defined benefit plans, to capture a significant portion of defined contribution assets has yet to become evident from the data. With very few exceptions, the top 50 managers ranked by internally managed defined contribution plan assets continue to be dominated by mutual fund families, banks and insurance companies.
Many consultants are starting to doubt whether traditional defined benefit asset managers will make much of a mark in the defined contribution business.
"There is a good reason they aren't making much progress," said Mr. Blank. "401(k) plans are aimed at, and tailored for, the plan participant. Name recognition is a big issue. These companies with large retail funds and large advertising budgets are recognized by plan participants. Most traditional institutional asset managers are late to the table with daily valuation of assets, and if you don't have that you can't participate. Traditional investment managers have not really gotten into these services (daily valuation, communications and other administrative services); they are trying to sell investments and that is a hard sell."
Mr. Murphy of Hewitt said one way traditional managers can start to attract defined contribution assets is to build a public presence by initiating institutional mutual funds. Institutional shares carry a somewhat lower fee than retail mutual funds, but have higher minimum investments.
"Defined benefit managers still must have a viable alternative in the marketplace .*.*. If they are smart they would consider institutional class of funds. It would seem to be the happy medium and a trade-off between the publicly traded information and low cost," said Mr. Murphy.
But whether participants would accept a non-name-brand fund alternative depends on the quality of the plan sponsor's investment education program, he added.
Mr. Murphy said defined contribution plan sponsors "have a little different dilemma" in selecting money managers than defined benefit plans.
"With defined benefit plans, they look to match the asset allocation to a liability. A defined contribution plan looks to match a range of investment choices to thousands of individual liabilities," he said. "The sponsor must weigh the comfort for participants with doing the best thing from an investment and expense point of view."
Expenses and fees are a growing concern among defined contribution plan sponsors, consultants claim, even though retail mutual funds continue to be the most popular investment options.
"I think this (fees) is the hot topic, and it is very hot with plan sponsors and increasingly with plan participants," said Mr. Murphy. "The first angry uprising by participants was the demand for more investment options; the next angry wave will be that these options cost too much."
Greg Metzger, defined contribution consultant with Watson Wyatt Worldwide, Los Angeles, agreed.
"Some employers and companies are paying way too much for defined contribution funds. Using (retail) mutual funds for a defined contribution plan is like going shopping for groceries at a convenience store," said Mr. Metzger.
Fees are another reason for the growth in indexing, said Mr. Blank.
"Employees have seen too many times in too many places that most active investment managers do not outperform the market indices. So they say, let's buy the index so they go to Vanguard and Barclays and Bankers Trust. They are watching the market rise and they are getting lower fees. The fee situation is becoming a whole major issue," said Mr. Blank.
Total asset figures in the P&I defined contribution profile data illustrate the total amount of assets invested internally by the manager. Manager of managers were not included in the data. Managers also could include assets held in company stock where the manager administers that plan option. The inclusion of company stock helped State Street Global Advisors maintain its position as the third largest manager of defined contribution assets with some $38.8 billion of its total $58.5 billion represented by company stock.
On the other hand, assets managed by subadvisers but included in a manager or mutual fund's family of funds were not included.
Some of Vanguard's most popular funds were not included in its total internal assets under management, such as its Windsor and Wellington funds, managed by Wellington Management Co.; Windsor II managed by Barrow, Hanley, Mewhinney and Strauss Inc.; U.S. Growth Fund managed by Lincoln Capital Management Co.; International Growth Fund managed by Schroder Capital Management; and the Vanguard Primecap Fund managed by PRIMECAP Management Co.