Solid year for the biggest mutual funds in DC plans

The top 25 managers of mutual funds most used by defined contribution plans ended 2007 with $1.59 trillion in assets — a 13.8% rise that dwarfed the less than 6% gain logged by leading U.S. stock market indexes during the year.

The previous year's 14.6% growth, while higher, had failed to keep pace with the S&P 500 index's 15.8% surge in 2006, suggesting a significant pickup in allocations to defined contribution plans during the latest calendar year.

Executives with leading managers said the Pension Protection Act, the 2006 law that paved the way for automatic enrollment and the use of target-date and lifecycle funds as DC default options, was a major factor driving growth for 2007.

The “big theme” for the past year was the pickup in demand for target-date and lifecycle funds, following passage of the PPA, said Jack Haley, executive vice president of Fidelity Investments' personal and workplace investing division. Fidelity reported a 9.9% rise in DC-related mutual fund assets at year-end 2007, to $482 billion.

Growing use of retirement date funds, automatic enrollment and automatic increase options by DC sponsors helped fuel T. Rowe Price's strong asset growth in funds used by DC plans last year, said John Doyle, director of marketing and communications for T. Rowe Price Retirement Plan Services, Baltimore.

Other executives cited an increase in demand for overseas funds, as well as investment options that offered protection against inflation or volatility.

Fidelity retained its top spot on the list of leading managers, and the next five managers also maintained their rankings: Capital Research & Management Co. in second place, up 20% to $343 billion; Vanguard Group Inc., up 18% to $277.8 billion; T. Rowe Price Group, up 20% at $85.8 billion; Pacific Investment Management Co., up 19% to $43 billion; and BlackRock Inc., up 18% at $40 billion.

Hartford Financial Services Inc. rose two spots to seventh place with an 18% gain to $32.1 billion, displacing OppenheimerFunds Inc., which fell to eighth place, with an 11% gain to $30.9 billion.

Wells Fargo & Co., with a 16% gain to $27 billion, climbed two rungs to ninth place, while Franklin Templeton Investments' 8.2% decline to $25.5 billion left the firm in 10th place, down two steps from the year before. In an e-mailed statement, Franklin Templeton said declining demand for value strategies and decisions by some plans to consolidate their DC and DB managers made 2007 a “challenging” year, but the firm “remains committed to the DC business.”

JPMorgan Retirement Plan Services dropped to 11th place from 10th place in 2006, with a 6.5% decline to $23 billion. Spokeswoman Jacqueline Meere said the fall in assets followed decisions by some DC plan clients to shift assets out of funds managed by affiliate American Century Investment Management Inc.

Executives with leading firms agreed that the ripple effects of the PPA was the top story of 2007.

Fidelity's Mr. Haley said his firm's “Freedom” family of target-date funds saw asset growth of between 20% and 30% in 2007, including a 23% jump for the Fidelity Freedom 2020 fund to $17.3 billion and a 30% surge for the Freedom 2030 fund to $11.8 billion. Freedom funds were the default option for 39% of the more than 16,000 plans Fidelity administered at the end of 2007, up sharply from 17% of more than 14,500 plans the year before, he noted.

Barbara Fallon-Walsh, a principal with Malvern, Pa.-based Vanguard's institutional retirement plan services business, said her company's “transparent, low-cost” target-date funds, with indexing at their core, proved a popular option with the large number of DC plan sponsors that issued RFPs for service providers last year as a matter of due diligence.

Vanguard scored “a number of significant wins” in 2007, said Ms. Fallon-Walsh, evidence that reports of imminent death for bundled providers in the age of open architecture were proving “greatly exaggerated.”

Stacy Schaus, a senior vice president and defined contribution practice leader with PIMCO, Newport Beach, Calif., said her firm's target-date series, just launched on March 31, is garnering interest from sponsors attracted by PIMCO's cautious approach to risk management and diversification.

Growing demand for international equity and bond products also spurred asset growth in 2007. Several of Fidelity's international funds saw defined contribution assets jump by roughly 50% last year, with half of that gain coming from market appreciation, noted Mr. Haley.

Combined asset allocation figures for the 25 top DC managers seemed to confirm that trend. At the end of 2007, international/global equities claimed an 18.6% share of overall assets, up 1.7 points from the year before, while domestic equities saw their share drop by 3.2 points to 52.6%. Making up the rest of the ground ceded by domestic equities, balanced/ lifestyle funds rose half a point to 14.6%, domestic bonds climbed 0.7 point to 8.3%, and money market funds edged up 0.3 point to 5.9%.

Among the equity funds most used in DC plans, American Funds Growth extended its already sizable lead, jumping 24% to $91.1 billion. The next four biggest funds belonged to Fidelity, with the firm's Contrafund, in second place, climbing 21% to $47.5 billion. Magellan, closed to new investors until the final month of 2007, displaced the Vanguard 500 index fund for third place, even as the storied fund's assets dropped 5.4% to $24.6 billion despite posting a stellar 19% gain for the year.

The Fidelity Spartan U.S. in-dex fund rose to fourth place from fifth, with a 5.8% gain to $24.5 billion. The Fidelity Growth Company fund, up 20% to $23.3 billion, climbed to fifth place from eighth the year before.

On the bond side, the top five fixed-income funds all maintained their previous year's rankings.

PIMCO's Total Return fund, run by bond guru Bill Gross, topped the list of fixed-income strategies most used by DC plans, with a 26% gain in assets to $35.5 billion. That one fund accounted for 93% of the growth in PIMCO's overall DC assets last year, as participants concerned about the spike in market volatility were drawn to its reputation for managing risk and volatility, said Ms. Schaus.

In second place, the American Funds Bond fund jumped 28% to $8.5 billion, followed by Vanguard's Total Bond Market index fund, up 6% to $6.1 billion; Fidelity's U.S. bond index fund, in fourth place, rose 16% to $5.6 billion, while the Fidelity Intermediate Bond fund came in fifth, edging up 0.4% to $3.2 billion.

Executives said the momentum seen in 2007 has continued to build in early 2008. PIMCO's Ms. Schaus noted that assets in the PIMCO Total Return Bond fund surged to $50.1 billion by the end of March, while accounting for a smaller 86% of PIMCO's overall DC asset growth as interest in other strategies, including Treasury inflation-protected securities, commodities and global bonds, has picked up.

Contact Douglas Appell at [email protected]