None of my clients are sitting and patting themselves on the back, said Steve Holmes, president of Summit Strategies Group, a St. Louis-based consulting firm. Now the theme is, What can we do to protect these gains of the past three to five years.
Assets for the top 200 retirement plans also increased, growing 14% to $5.6 trillion for the period. Thats the largest gain in four years.
Youre in a five-year, major financial market increase, Mr. Holmes said. But I get the sense that everything that is going on is going to come to a halt.
Many people are saying if we wind up flat (in 2008) wed be happy.
(See US Fund Execs Doubtful that Performance in 08 Will Meet Their Targets.)
Defined benefit assets of the 1,000 largest U.S. retirement plans grew 13.1% to $5.4 trillion, while defined contribution assets grew 14.4% to $1.96 trillion.
For the 200 largest plan sponsors, defined benefit assets increased 13.8% to $4.4 trillion, while defined contribution assets increased 14.6% to $1.2 trillion. Defined contribution assets now comprise 26.6% of all assets held by the 1,000 largest retirement plans and 21.3% of top 200 plan assets.
On a market-adjusted basis, assets of the top 1,000 plans overall and the top 200 plans held relatively steady, dipping 0.4% and 0.3%, respectively, during the period .
Ahead of the trouble
Through the end of September, you had all the markets performing well. Real estate hadnt gotten hammered yet and the emerging markets did very well, said Joseph E. Finn, principal and managing director for Punter Southall & Co., LLC, Framingham, Mass.
While consultants noted that the latest P&I data were positive, each consultant interviewed expected lower returns for 2008.
In aggregate, retirement plans moved into alternative asset classes at the expense of U.S. equities, showing that plan executives are still very much focused on diversifying their portfolios and on trying to eke out some extra return in the coming years.
Only 40.7% of total assets held by the defined benefit plans among the 1,000 largest plans was invested in U.S. equity, down from 43.7% the year before. Domestic equity assets of the top 200 defined benefit plans dropped 3.2 percentage points to 39.9%.
The U.S. fixed-income allocation fell to 23.9% from 25.4% for defined benefit plans among the top 1,000 and to 23.7% from 25.5% for the top 200.
Defined benefit plan allocations to international equity, international fixed income, private equity and real estate equity all grew. Most noticeably, international equity increased 1.8 percentage points to 18.6% for the top 1,000 and 1.9 percentage points to 19.9% for the top 200, and private equity allocations rose 0.9 percentage points to 4.5% for the 1,000 and 1 percentage point, to 5.1%, among top 200 plans.
The other category under which many respondents included hedge funds, hedge funds of funds, absolute-return and portable alpha strategies rose 0.6 percentage points in both the top 1,000 and top 200 universes, to 4.1% and 2.9%, respectively.
Hedge fund assets reported by the defined benefit plans among the top 200 increased 51% to $76.3 billion for the 12-month period. That includes a 67% increase in direct investments, which totaled $38.6 billion, and a 38% increase in fund-of-funds investments, which totaled $37.7 billion.
U.S. exposure decline
The increase in international exposure largely was the result of foreign markets outperforming the U.S., said Dick Charlton, chairman and chief executive officer of New England Pension Consultants, Cambridge, Mass. The MSCI EAFE Index returned 25.4% for the survey period, while the Russell 3000 returned 16.5%. The jump also was due in part to plans reducing their U.S. equity exposure, which Mr. Charltons firm has been recommending to clients for at least the past two years, he said.
Paul Morgan, senior consultant and director of capital markets for Evaluation Associates Inc., Norwalk Conn., agreed that plan sponsors in 2007 focused more on reducing their beta exposure and reallocating their risk budgets into alternatives and international markets.
Mr. Morgan also noted the composition of the international exposure has changed a lot
the emerging markets portion of your international allocation has gone up as well.
Emerging markets had stellar returns in 2007, which led to large asset gains in those international equity portfolios. The MSCI Emerging Markets Index returned 58.63% for the 12 months ended Sept. 30. The top 200 defined benefit plans had $96.8 billion in emerging market assets, a 23% increase from the year before.
Defined contribution plans continued to increase their share of the top 200 plan asset pool, although only slightly. Defined contribution assets accounted for 21.3% of the assets, compared with 21.2% a year earlier.
Defined contribution assets for the 1,000 largest U.S. retirement plans held 49.4% in U.S. equity, down 1.4 percentage points from the previous year, and 8.6% in international equity, up 1.5 points. Stable value assets showed the biggest decrease, falling to 11.6% of DC assets from 13.5% the year before.
DC plans among the top 200 showed similar shifts. The aggregate asset mix showed international equity gained 1.8 percentage points while stable value fell two points.
The decrease in stable value assets could be attributed solely to changes among participants of corporate DC plans, which reduced their stable value holdings to 13.2% from 15.9% the year before. Stable value assets for public defined contribution plans actually increased 0.8 percentage points while participants for Taft-Hartley defined contribution assets increased 2.4 percentage points to 10.2%.
The Pension Protection Act has increased the liability of those who oversee corporate plans, Mr. Charlton said. As a result, trustees are taking a much closer look at participant education. Through that education, participants are learning that large allocations to stable value funds will not leave them with enough money to retire, he said.
Im not sure if that emphasis on education has caught up in the public sector, he said.
Other highlights from the 2007 survey include:
• Contributions by defined benefit plan sponsors among the 200 grew nearly 4%, to $67.2 billion; benefits paid fell 4% to $156.6 billion.
• Larger plans posted larger percentage gains; the largest 100, 50 and 25 sponsors posted gains of 14.3%, 15.7% and 16.1%, respectively.
• Public pension funds continued to dominate the market share of retirement plan assets in the top 200. Public funds accounted for 54.5% of top 200 assets, corporate funds accounted for 35.1% of assets, miscellaneous funds made up 8.1% of assets and Taft-Hartley plans rounded out the remaining 2.3%.
• Assets managed internally by defined benefit funds in the top 200 increased 7.1% to $1.23 trillion. Internally managed assets of defined contribution plans grew 13%, to $141.8 billion.
• Indexed equity assets held by defined benefit plans in the top 200 fell 5.4% this year to $743.5 billion. Assets in indexed bonds grew 41.7%, enhanced indexed equity grew 21.7% and enhanced bonds, 1.4%. Among defined contribution plans in the top 200, indexed equity grew 16.9%, indexed bonds also grew 16.8% and enhanced index equity assets fell 15.5%.
As part of the survey, fund executives were asked which investment managers they use. The most commonly mentioned defined benefit domestic equity managers were Barclays Global Investors, with 53 mentions; Wellington Management Co. LLP, 34 mentions; and State Street Global Advisors, 32 mentions.
The most frequently used U.S. fixed-income managers among defined benefit plans were Western Asset Management Co., with 39 mentions; Pacific Investment Management Co., with 33 mentions; and BlackRock Inc., 30.
For defined contribution plans, the most-mentioned investment managers overall were Vanguard Group Inc. with 82 mentions; Fidelity Investments, 81; and SSgA, 73.