Defined contribution assets of the 200 largest U.S. retirement plans rose 14.6%, with a significant shift into international equity investments and out of stable value, Pensions & Investments' annual survey found.
Among the nations 200 largest plan sponsors, 154 reported offering defined contribution plans. DC plans had a total of $1.19 trillion as of Sept. 30, up from 153 reporting $1.04 trillion a year earlier. On a market-adjusted basis, the total DC assets increased 1.5%
Plan sponsors and participants alike are spending more time focusing on investments in DC plans. Lori Lucas, defined contribution practice leader for Callan Associates, San Francisco, said that as more corporations freeze or close their defined benefit plans, defined contribution plans are continuing to be the retirement plan of choice.
Investments in international equity among defined contribution plans in P&Is top 200 rose to 10.7% of DC assets, from 8.9% a year earlier. Domestic equity allocations held fairly steady at 52.4%, from 52.5%, while fixed income (excluding stable value) dropped to 8.5% from 9.3% and stable value fell to 12.6% from 14.6%.
The increase in international equity assets reflects participant behavior, said Ms. Lucas.
Thats very typical to see, as participants do not commonly make many movements, but when they do, they move significant amounts of money. And they chase performance. It makes sense that they would move into international equity. Its a very common behavior to chase performance, she said.
2 main themes
Mark Ruloff, consultant with Watson Wyatt Investment Consulting Inc., New York, said, Two main themes are changing (participant) savings patterns: (one is) to increase savings and the other is the attempt to compensate undersaving by being more aggressive.
I think you are seeing more participants move into international (equities) and the alternative space. In the DC world, there is a recognition that participant savings will not get them to the goals they were shooting for and they are looking to be more aggressive, said Mr. Ruloff.
Among plans adding international equity options during the year ended Sept. 30 was the New York State Deferred Compensation Plan, Albany.
Executive Director Edward Lily said the $10.5 billion 457 plan added two international equity funds in June because of participant interest. The plans active international portfolio is managed by AllianceBernstein Inc., Northern Trust Global Investments, NWQ Tradewinds Global Investors, Julius Baer Investment Management and Martin Currie Investment Management. The indexed portfolio is managed by Northern Trust.
Indexed investment options continued to be a strong favorite.
Traditional indexed equity funds increased 16.8%, to $229.4 billion, while indexed bonds also rose 16.8% to $21.5 billion.
The defined contribution plans of the Federal Retirement Thrift Investment Board, Washington; International Business Machines Corp., Armonk, N.Y.; and Boeing Co., Chicago, led the overall indexed strategies rankings, with $141.96 billion, $17.62 billion and $10.69 billion, respectively, according to data from the funds.
While international equity and indexed assets were on the rise, stable value assets had a steep decline. Stable value portfolios held 12.6% of assets as of Sept. 30, compared with 14.6% a year earlier.
Stable value will continue to drop even more. Participants are moving out of stable value into more aggressive asset classes and target-date funds. And changing defaults had an impact in 2007, said Mr. Ruloff.
(In October, the Department of Labor identified target-date funds, managed accounts and balanced funds as qualified default investment options for defined contribution plans; noticeably absent from the qualified list was stable value. )
William Schneider, managing partner at DiMeo Schneider & Associates LLC, Chicago, agreed the drop in stable value is probably due in part to a change in default options for automatically enrolled 401(k) plan participants.
I imagine defaults have something to do with it, he said, adding that stable value investment is likely to continue declining as more plans switch to the approved options.
Assets in alternative asset classes also dipped, according to P&Is data.
Defined contribution plan investments reported in real estate investment trusts fell during this surveys period. Fifteen funds reported assets in real estate investment trusts with a total of $1.95 billion invested, compared with 14 funds and $2.6 billion invested a year earlier.
Eighteen funds reported investing a total of $3.17 billion in Treasury inflation-protected securities, compared with 13 funds investing $3.3 billion last year.
For the first time, P&I also asked defined contribution plans about assets in commodities. Only two funds listed assets: the United Methodist Church General Board of Pension and Health Benefits, Evanston, Ill., reported $139 million in commodity investments and Citigroup Inc., New York, $6 million.
Mr. Ruloff said alternative asset classes like REITs, TIPS and commodities are on the rise in target-date funds, but he doesnt see many plans offering them as core investment options.
You see alternatives in some of the very large plans, but there is a movement to include these classes in target-date funds, said Mr. Ruloff, adding that participants chase market returns and moved assets out of lower-performing REITs during the survey period.
The defined contribution plans of IBM; Ford Motor Co., Detroit; and the United Methodist Church held the most assets in REITs, with $1.25 billion, $273 million and $105 million, respectively.
The United Methodist Church, IBM and University of California, Oakland, Calif., reported the most assets in TIPS, with $1.2 billion, $1.05 billion and $207 million, respectively.
In light of the Department of Labor finalizing the qualified default investment options for automatically enrolled participants, target-date funds continue to gain assets.
Indeed, 154 of the 163 plan sponsors reporting defined contribution plans in P&Is survey offered age-based lifecycle or risk-based lifestyle funds.
Target-date funds became more popular in 07 and we will see more of that going forward. Target-date funds also got more aggressive. Managers saw the typical participant was not saving enough and shifted the funds to be more aggressive, said Mr. Ruloff.