Internally managed defined contribution assets dropped 8.3% in 2002, to $1.9 trillion as of Dec. 31, 2002. It was the first time internally managed assets have been below $2 trillion since 1999, according to Pensions & Investments' annual survey of defined contribution asset management firms.
Overall defined contribution assets dropped 8.1%, after rising a mere 1.7% in 2001.
The drop in internally managed assets came despite there being 357 managers in the 2002 survey, 10 more than the previous year. Last year was the third year in a row that assets declined, following a 1.4% drop in 2001 and a 7.7% drop in 2000.
Eight of the 10 largest managers of defined contribution assets experienced declines in 2002. Putnam Investments, Boston, saw its internally managed defined contribution assets fall 18%; State Street Global Advisors, Boston, also saw an 18% drop; Fidelity Investments, Boston, 14%; ING US Financial Services, Atlanta, 10%; Teachers Insurance and Annuity Association - College Retirement Equities Fund, New York, 6%; Vanguard Group Inc., Valley Forge, Pa., 2%; and Barclays Global Investors, San Francisco, and Principal Global Investors, Des Moines, Iowa, with slight slips of 0.1% and 0.8%, respectively.
Among the 10 largest firms, only Atlanta-based INVESCO and Capital Research & Management Co., Los Angeles, managed to show an increase in defined contribution assets. INVESCO added 8.3% to its internally managed asset base and ended the year with a total of $50.3 billion. Defined contribution assets at Capital Research were up 3%, to just less than $86 billion.
Principal Global Investors was the only new name among the 10 largest managers. Principal moved up two spots to ninth place, with a total of $45.6 billion in internally managed defined contribution assets as of Dec. 31. American Express Financial Corp., Minneapolis, fell out of the top 10 as its assets declined nearly 30%. An American Express spokesman said most of the decline was due to market deterioration and a change in reporting for the firm's retail 401(k) products between 2001 and 2002. He said the actual decline for American Express Retirement Services was closer to 17%.
"We had a good year in 2001 and 2002," said Hubert L. Harris Jr., chairman and chief executive officer at AMVESCAP Retirement Inc., which, like INVESCO, is a subsidiary of AMVESCAP PLC, a London-based global asset management firm. "A couple of things drove our growth in 2002. There was a pronounced shift by many plan participants to stable value products ... Next, we experienced very consistent growth in acquiring new customers while retaining our existing clients. An important factor in this business is not to go backward, and we have a very high degree of client retention, around 90% plus for a number of years."
Another important factor in the asset growth at INVESCO, according to Mr. Harris, is its alliance network. He said INVESCO has 11 strategic relationships with financial service and consulting firms that outsource all or a portion of their defined contribution business to INVESCO.
The continued decline in assets in 2002 came as no surprise as the three-year bear market lumbered on, taking its toll on stock-heavy participant-directed plans. The typical 401(k) plan balance averaged 60% to 70% stocks, according to industry experts. The bellwether Standard & Poor's 500 stock index returned -22.1% in 2002, and the Wilshire 4500 returned -17.8%.
"A lot, if not most, of the decline in assets was related to the decline in market value of stocks rather than reallocation of assets among providers," said Michael Weddell, senior retirement consultant with Watson Wyatt Investment Consulting, Southfield, Mich.
Mr. Weddell said the list of the largest 25 defined contribution asset management firms has been relatively stable over the last few years and is likely to remain so for some time.
"We've seen fewer plan sponsors searching for new 401(k) record keepers or just changing investment funds than we did in the 1998-2000 period," said Mr. Weddell. "In a bear market, HR people probably have more pressing issues to deal with, especially coming out of an economic recession. Plan sponsors are less likely to be conducting searches in that kind of environment. It's OK to do that when profits are healthy, but coming out of a recession, they are less likely to make a move."
"In addition," he said, "there are fewer demonstrably bad providers than in the past."
Separate accounts up
As defined contribution assets declined, so did assets in most of the investment vehicles used by the asset managers. Only separate account management showed a gain in 2002, a slight 1.6% increase to $380 billion. Mutual funds slipped for the second year in a row, dropping 13.3% to $729 billion. Variable annuities declined 9.3% to $233 billion. Assets in lifecycle and asset allocation funds declined more than 11% to $85 billion in 2002, after gaining nearly 8% the previous year.
Given the unrelenting decline in the stock market, the shift in defined contribution asset allocation, which shows equities continuing to shrink, is not surprising. Equities make up more than half of defined contribution assets reported by the managers in the survey, but the percentage contracted in 2002 for the third year in a row. Equities represented 52.3% of overall defined contribution assets, down from about 60% in 2001 and 66% in 2000.
The allocation to bonds held relatively steady in 2002 at 17.4%, up only slightly from 16% the year before and 15.9% in 2000.
The clear beneficiary of the carnage in the stock market in 2002 was stable value funds, which jumped to 21.9% of defined contribution assets. Stable value allocations have been climbing as the percentage allocation to equities has shrunk. Defined contribution plan allocations to stable value assets have climbed steadily from 16.4% in 2001 and 12.4% in 2000.
Increased allocations to stable value funds helped propel Dwight Asset Management Co., Burlington, Vt., into the top 25 largest managers of defined contribution assets.
Laura Dagan, chief operating officer at Dwight, said stable value cash flow has been on the rise for the past two years, compared with "negative cash flow" into stable value during the equity bull market of the 1990s. In addition, she said, Dwight manages one of only a few stable value mutual funds.
Look to stable value
Mr. Weddell of Watson Wyatt said the growth in separate account management of defined contribution assets might be partly due to the corresponding increase in the allocation to stable value investments.
"There are very few stable value mutual funds available," he said. "Most stable value assets are managed by separate account managers, and the shift (in defined contribution allocations) to stable value is part of the reason for the growth in separate account management."
Safety and the lack of volatility weren't the only reasons for the shift. Stable value investments returned an average of 6.49% in 2000 and 5.6% in 2002, according to Hueler Analytics Inc., a Minneapolis-based stable value consulting and database firm.
"The (stock) market upheaval last year resulted in a surge of interest in stable value. We have had more consultants calling us, interested in buying our data and research, than ever," said Keli Hueler, president. "I wish the market hadn't had to do what it did to have that happen." Ms. Hueler said she expects allocations to stable value assets in defined contribution plans to stabilize at around 25% to 30% of assets, and she doesn't expect a return to the 50% and higher allocations common in the late 1980s.