Correcting market forces propelled by the Sept. 11 terrorist attack and the Enron debacle reversed the growth trend of internally managed defined contribution assets for the second year in a row, according to Pensions & Investments' annual survey of defined contribution money managers.
Internally managed defined contribution assets dropped to $2.08 trillion as of Dec. 31, dipping 1.4% from the year before.
Total defined contribution assets were relatively flat, growing by a slim 1.7% to $2.33 trillion. (A portion of this increase could be attributed to the 26 additional money managers surveyed this year, for a total of 347 managers in this year's survey. One manager that wasn't part of last year's survey, General Motors Asset Management Corp., New York, manages $18.5 billion in total defined contribution assets.)
And, while internally managed assets suffered a fall this year, it was not as severe as the 7.7% drop in 2000.
Moreover, money managers hope the federal tax law that passed last year, the Economic Growth and Tax Relief Reconciliation Act of 2001, with its higher contribution rates and catch-up provisions allowing older workers to save more for retirement, will infuse more cash into the defined contribution system.
This year for the first time, the overall ranking of managers is by total defined contribution assets, not just internally managed assets. All other data are based on internally managed assets, unless otherwise specified.
The outcome was mixed for the top 10 managers ranked by internally managed assets. No. 1 Fidelity Investments, Boston, and No. 2 Teachers Insurance and Annuity Association-College Retirement Equities Fund, New York, both lost assets for the second year in a row. Fidelity was down 4%, and TIAA-CREF dropped 5.5%. Also down, but retaining their positions in the top 10, were fifth-ranked Barclays Global Investors NA, San Francisco, whose assets under management fell 8.5%; sixth-ranked Capital Research & Management, Los Angeles, down 9.1%; and eighth-ranked Putnam Investments Inc., Boston, which lost 9.8%.
"DC assets were down because of the market, but they were down a lot less than the market because we had a great sales year," said Peter Smail, president of Fidelity Employer Services Co., Boston.
The number of new plans and number of participants grew by 15% each, Mr. Smail said.
"That cushioned us against the market," he noted.
However, Boston-based State Street Global Advisors Inc., at No. 3 for the year ended Dec. 31, was up 2.2% over the previous year. Other Top 10 managers gaining assets for the year were: fourth-ranked Vanguard Group Inc., Valley Forge, Pa., up 6.3%; ING US Financial Services, Atlanta, up 7.9%; ninth-ranked American Express Financial Corp., Minneapolis, up 6%; and 10th-ranked INVESCO, Atlanta, up 5%.
"The defined contribution industry still represents a vast amount of potential and touch points to 50 million consumers," said Peter Starr, managing director of Cerulli Associates Inc., Boston. "The (defined contribution) market has not lost its luster. ... That said, there's no question if it turns to three consecutive years of declining markets, they (managers) will have to redefine services."
Money managers in the defined contribution arena will have to compete efficiently, he said: "They cannot do it (run their businesses) in the same old way as they did in the past."
The types of investment vehicles that attracted the most defined contribution assets for the year ended Dec. 31 were in a state of flux. Once again, mutual funds lost ground to separate accounts and variable annuities, compared with the previous year. While assets in mutual funds dropped 4.6% to $841 billion in 2001, variable annuities made up some of their 2000 loss with a 13% increase. Meanwhile, separate accounts gained a more modest 9% in 2001.
Lifecycle and asset allocation portfolios also gained popularity, up 7.7%.
The declining stock market did take its toll on defined contribution assets in 2001, as the lion's share of overall defined contribution assets was still invested predominantly in stocks. Nevertheless, assets in equities are down 6.2 percentage points from the previous year, to 59.5%. That money did not go into bonds portfolios, whose allocation was flat, but to safety in stable value, which rose four percentage points to 16.4% of overall assets, and cash, which attracted an additional two percentage points.
Among top mutual fund managers that suffered the most from this shift was Janus Capital Corp., Denver, whose assets under management dropped 23% for the year ended Dec. 31, compared with the previous year.
Some managers that did grow in 2001 did it "organically" by adding new business, but many did it by acquisition.
One example is First Union National Bank's purchase of Wachovia Bank in April 2001. First Union's fund manager, Evergreen Investments, Boston, gained 8% more assets under management to $6.2 billion in 2001.
"In mid-2000, we expanded our offering through financial intermediaries," said Joe Ready, president of First Union/Wachovia Benefit Services Group, Charlotte, N.C. "In 2001 we had real success in getting our story out."
First Union also increased the capability of its record-keeping system, allowing it to offer services and money management to the large plan market, Mr. Ready said.
"We improved on all fronts to make us more successful on the sales side," he explained. "Plus we focus on client retention."
"We had a pretty good year last year, all things considered," said Hubert Harris, chief executive officer of INVESCO. "We started at a low point. We felt it was a negative market year, and we had substantial growth and fairly large partnership/client acquisition."
"Separate from that, we had over 100 new account sales on a full-service basis," Mr. Harris said. "While they weren't all large plans, they were mostly midlevel plans. ... we're not losing a lot of plans." About half of INVESCO's gains were from acquisition, and the other half from new business, Mr. Harris reckoned.
Mr. Harris predicts more consolidation of money managers in the defined contribution business, including more acquisition and partnership announcements by INVESCO.
"We're not unique in that," he said. "We all priced the business on expectation of assets that are far less now. Revenues are off. Providers will look at their accounts and go back to plan sponsors."
Providers, including INVESCO, will be returning to plan sponsors this year to cut new fee deals because the assumptions are off, Mr. Harris said. And once providers return to make higher fee arrangements, plan sponsors will start shopping, he said.
Also, while EGTRRA changed a lot of things for the better, new legislative pension proposals could reverse those improvements; and many plan sponsors are waiting before making plan changes, Mr. Harris said.
Dave Kovaleski contributed to this story.