Assets of the 1,000 largest employee benefit funds topped $4 trillion as of Sept. 30, climbing 20.6% from a year earlier, according to Pensions & Investments' 1998 survey of plan sponsors.
Total assets of the 200 largest funds climbed to $3.1 trillion, an increase of 24% from a year ago.
A bull market for U.S. equities, and funds' increased exposure to domestic stocks, pushed asset totals to their new trillion-dollar records. Indeed, the stock allocation of corporate defined contribution plans in the top 200 almost hit 70%, including company stock.
Defined benefit plan assets among the 1,000 funds climbed to $3.2 trillion, an increase of 20.2%. On a market-adjusted basis, however, that's a 3.2% decline.
Defined benefit plan assets among the top 200 rose to $2.5 trillion, an increase of 19% from a year earlier's $2.1 trillion. That gain becomes a 2.7% decline on a market-adjusted basis, though.
The relationship between contributions and benefit payouts could have hurt the growth of defined benefit plans in P&I's top 200. Those funds reported contributions of $44.1 billion, but benefit payouts of $94.1 billion.
The survey found big increases in equity exposure.
Defined benefit plans among the 1,000 largest employee benefit funds had an average of 61% of their assets in equities, up from 56.5% a year earlier.
And for the largest 200 funds, equities topped 60%, the highest level since the 1970s.
(All numbers are as of Sept. 30,unless otherwise stated.)
The aggregate U.S. and non-U.S. equity allocation for the 200 largest defined benefit plans rose to 60.1%, up from 56.2% a year earlier. The aggregate equity allocation for defined contribution plans rose to 67.5%, an increase from 58.6% the previous year.
The increase in equity allocations was fueled by the U.S. market, which returned 40.5% in the 12-month period, as measured by the Standard & Poor's 500 index.
But P&I's pension fund directory, its 24th annual, also indicates plan sponsors rebalanced their assets out of stocks as share prices climbed.
International allocations also grew.
The largest 200 pension funds put more than $65 billion into non-U.S. stocks, the survey results show, after adjusting for the relatively meager returns provided by equity markets outside of the United States. (The Morgan Stanley Capital International Europe Australasia Far East Index returned 12.5% in the one-year period).
Positive move
The move to higher equity allocations by U.S. pension funds is a positive one, consultants say.
"The equity allocation is so important. That is the major story," said Steve Nesbitt, senior vice president with pension consultant Wilshire Associates Inc., Santa Monica, Calif.
Mr. Nesbitt applauded the rise in equity allocations. Over the long term, stocks outperform bonds, so an increased stock allocation will lead to better performance, he said.
Moreover, bonds at current yield levels can't beat most plans' assumed actuarial rates, which are around 8%.
Pension executives recognize this, and have hiked equities and reduced fixed income as a result.
In addition, said Ron Peyton, president and chief executive of Callan Associates Inc., San Francisco, some of the equity allocation growth comes from letting allocations drift higher with higher stock prices.
It's psychologically difficult to sell stocks when prices are rising, he said.
Still, there are signs of a significant amount of rebalancing.
Survey results indicate the largest 200 pension plans pulled about $140 billion in defined benefit assets out of the U.S. stock market in the one-year period.
Roy Pentilla, acting director of Michigan's Bureau of Investments, which oversees $40 billion in defined benefit assets for the state's Department of Treasury in Lansing, said department executives will let their allocations rise based on their views on where the market is headed. In the past three years, that's paid off for Michigan's fund.
Nonetheless, U.S. stock prices rose enough that Michigan periodically rebalanced assets closer to the fund's targets, which are set annually.
"The targets are very important," he said.
Michigan's allocation targets for 1998 are 53% equities, 30% fixed income, 1% cash, 8.5% real estate and 7.5% alternatives.
DC allocations change
Defined contribution plan equity allocations also grew among the largest 200 plans, benefiting from the U.S. stock market's growth, as well as educational efforts by sponsors.
The aggregate equity allocation of defined contribution plans was 67.5%, which includes company stock, an increase from 58.6% the previous year.
Among corporate DC plans in the top 200, the aggregate equity allocation was 69.4% - 40.6% in company stock and 28.8% invested in other stock.
A year earlier, total equity allocations were 63.3% - with 36.5% invested in company stock and 26.8% invested in other stock.
It used to be that stable-value products made up the biggest part of defined contribution plans.
In P&I's survey published in 1990, for example, investment contracts made up 31.6% of defined contribution assets among the largest 200 funds, and cash made up 8.9%. Stocks were only 41.8%.
Now, stable value funds are 17.5% of top 200 DC assets, while cash is just 3.1%.
"The driving force is the tremendous educational effort going on," Callan's Mr. Peyton said.
Robin Pellish, managing director and senior consultant for RogersCasey & Associates Inc., Darien, Conn., agreed the increase had "a lot to do with employee education efforts finally taking hold."
But the market's stellar performance also has played a role.
"Individuals don't tend to rebalance," Ms. Pellish said.
Among the top 200 sponsors' defined contribution plans, the biggest percentage growth came in lifecycle and lifestyle fund assets, which rose 91.5% to $9 billion.
Indexing still gains
Indexed equity assets continued on a growth path, rising 47.4% to $594.5 billion.
Mr. Nesbitt of Wilshire said that as long as the S&P 500 outperforms most active managers, institutions are going to keep moving to indexing. "It's inevitable," he said.
"Small stocks are going to come back at some point, and people will get interested in active management again."
Other sectors that grew rapidly in the period were: international equities; emerging market equities; venture capital; buyout/acquisition funds; and high-yield bonds.
International equity allocations rose to 11% of defined benefit assets, up from 9% the previous year, bolstered by big increases by large public pension funds.
Mr. Peyton said pension funds' continued move into international equities, which have lagged the U.S. market, is a positive development.
"That's another sign of the sophistication of the marketplace. People are being countercyclical.
"Our activity in international at Callan was almost dead in 1996, but was very active in '97."
