BOSTON -- The growth rate of 401(k) assets is continuing to level off, reflecting a maturing market.
Assets are projected to grow 12% this year, compared with 15% in 1998 and 20% in 1997, according to Cerulli Associates Inc., Boston.
"It was growing at such exponential rates over the last 10 years," said Peter Starr, a consultant who runs Cerulli's retirement consulting practice. "It would be impossible to grow at a 17% or 18% growth rate. It's a maturing market."
In the past decade, the large number of new 401(k) plans was responsible for "jump-starting the asset growth," Mr. Starr said.
Cerulli expects 401(k) assets will grow to nearly $1.56 trillion by the end of 1999 from about $1.4 trillion at year-end 1998, the report disclosed.
The study also predicted a mild withdrawal from the 401(k) market's historical preference for retail mutual funds, Mr. Starr said.
According to the study of 1998 data from various sources, including Cerulli interviews with market sources and Department of Labor statistics, 30% of 401(k) assets -- $419 billion -- are invested in institutional mutual funds, commingled accounts and separate accounts; 33% of 401(k) assets are in retail mutual funds; and 37% is in other vehicles. Cerulli projects that in 2001, 39% of 401(k) assets will be in institutional vehicles, 31% will be invested in retail mutual funds and 30% will be in other vehicles.
"This is the first time the prevalence of the retail mutual fund vehicle is beginning to decline," Mr. Starr said.
But while the projected dip of a few percentage points in 401(k) assets invested in retail mutual funds between 1998 and 2001 is not startling, he said, it is a "gathering of steam" toward institutional investment vehicles.
The trend is "evolutionary, not revolutionary," Mr. Starr said.
"Is it sizzle? Probably not. Is it affirmation of a marketplace for institutional managers? I think it is," he said.
Fidelity Investments, Boston, however, in a recent study of its own clients, pooh-poohed talk of a switch to institutional vehicles.
"While 'institutionally priced' commingled pools and separate account vehicles have gained a lot of attention recently, a very small percentage of plans currently offer them, and these are predominantly large plans," the Fidelity report stated.
Three percent of medium plans -- those with between 500 and 2,499 participants -- offered commingled and separate accounts in 1998, down from 4% in 1995. And only 0.3% of plans with fewer than 500 participants offered commingled and separate accounts in 1998, down from 0.4% in 1995, Fidelity's study indicated.
More pooled or separate
According to Fidelity's numbers, 15% of plans with more than 2,500 participants offered domestic equity pooled or separate account vehicles in 1998, up from 13% in 1995.
Overall, domestic equity index vehicles and domestic equity pooled and separate account vehicles accounted for a small percentage of plan assets in 1998, Fidelity's study revealed. The latter, for example, held between 0.03% of small plan, 0.8% of medium plan and 4% of large plan assets in 1998.
This might not be surprising, as Fidelity traditionally has been known for its mutual funds. According to Pensions & Investments' 1999 survey of defined contribution managers, of the $287 billion in total defined contribution assets managed by Fidelity, only $38.6 billion was in commingled accounts at year-end 1998.
Of all large plans run by Fidelity that offer both domestic equity mutual funds and domestic equity pooled and separate account vehicles, 31% of assets in 1998 were invested in mutual funds, compared with 11% in pooled and separate accounts.
Still, Cerulli's study predicts institutional vehicles will gain an edge in market share over the next few years. Cerulli anticipates the institutional mutual fund share of the 401(k) assets will be 13% in 2001, rising to 15% by 2003. By comparison, institutional mutual funds in 1998 accounted for 6% -- $84 billion -- of 401(k) assets, the study indicated. The percentage of 401(k) assets invested in separate accounts in 1996 and 1998 held steady at 16%, but Cerulli projects those vehicles will account for 17% of the market by 2001.
"Separate accounts have continued a steady growth pattern in the larger end of the market (10,000-plus lives) . . . but have not made their case effectively to the sub-10,000 life market," the study pointed out.
Part of the reason for the movement of market share toward institutional vehicles is price, Mr. Starr explained. According to an investment product fee comparison in the study, which Mr. Starr called the $1 million chart, an actively managed retail large-capitalization equity fund costs on average 122 basis points, compared with 83 basis points for a similar institutional mutual fund, 63 basis points for a commingled active fund and 54 basis points for a separate account.
Another factor pushing the market toward institutional investment vehicles is that many managers have designed 401(k)-friendly commingled accounts that can communicate with daily valuation systems, Mr. Starr said.
In the past, that was not the case, he said.
"Barriers to entry (for commingled and separate accounts) are falling away," Mr. Starr said.
The Internet is making it possible for participants to see the unitized pricing of their funds on a daily basis, so it is less important that participants cannot look up commingled and separate accounts in the newspaper, Mr. Starr said.
Plan sponsors think there is less chance a separate account or commingled account will stray from its indicated style because the money managers must must strictly adhere to a stated investment policy, he said.
"This eliminates style drift, which is an important concern," Mr. Starr said. "Mutual funds can change on a moment's notice and not tell anybody."
And, he said, participants' addiction to "brand name" or well-known mutual funds is overstated.
"Two percent of participants are very vocal. Another 10% of participants follow their investments closely and want a lot of choice of what they select," Mr. Starr said. "But the silent majority don't care if Money magazine ranks their mutual funds in their list of top mutual fund selections."
That is, he said, as long as the plan sponsor properly communicates information about the non-brand-name fund.
In response to the anticipated market changes, many retail managers are creating institutional classes of their popular mutual funds, the so-called "I" shares, Cerulli's report stated.
At year-end 1998, institutional share mutual funds accounted for 6% of all 401(k) assets, up from 2% in 1996. Commingled funds, not including stable value, now account for 8%, or $112 billion, of 401(k) assets, up from 6%, or $61 billion, in 1996. Cerulli projects acceptance of commingled funds, particularly in the 1,000- to 5,000-participant market, is likely to increase their percentage of assets in the 401(k) market to 9%, or $175 billion, by 2001.