Consultants said the dominance of domestic large-cap index funds can be explained primarily by ease of administration and ease of understanding by participants.
“An S&P 500 index fund is the most popular index fund,” said Robin Pellish, CEO of Rocaton Investment Advisors LLC, Norwalk, Conn. “It's more readily accepted by participants because they recognize the index.”
Large-cap domestic equity index funds also are popular for sponsors because the asset class “is a very challenging place for active managers to generate returns that are better than the S&P 500 index,” she said.
Lori Lucas, executive vice president and defined contribution practice leader at Callan Associates Inc., San Francisco, said active large-cap managers have a tougher time outperforming indexes than do active managers in other asset classes.
She said Callan consultants have detected anecdotal evidence that clients are increasing their use of index funds, especially domestic large-cap equity funds.
Based on Callan's quarterly DC Index, which tracks more than 70 clients' large DC plans, the firm found that index funds represented 30% of the total category of large-cap domestic funds in March 2006, Ms. Lucas said. By March 2011, the index fund percentage in this asset class had climbed to 39%.
History also has played a role in the dominance of large-cap domestic index funds in DC plans.
“In the early years of DC plans, beyond company stock, there were basically three options — a stable value fund, a balanced fund and an index fund tied to the S&P 500,” said Kevin Vandolder, a Norwalk, Conn.-based principal for Hewitt EnnisKnupp Inc. “This index fund was the most readily available, and that's why it still dominates. There's inertia.”
Consultants said index funds are gaining popularity in DC plans for multiple reasons, including plan executives' efforts to reduce fees paid by participants, to comply with existing and pending fee-disclosure regulations, and to try to reduce the risk of breach-of-fiduciary-duty lawsuits tied to fees and investment options.
Index options also are increasing because of evolving strategies in plan design. “You can construct an efficient portfolio with lower costs and simpler choices,” said Mr. Vandolder, whose firm advocates a tiered approach that includes target-date funds, index options, actively managed funds and a self-directed brokerage window.