DC funds grow 4% to all-time high

Defined contribution assets among the 200 largest retirement plans reached a record of $1.236 trillion for the 12 months ended Sept. 30, up nearly 4% from the previous year's $1.19 trillion, Pensions & Investments' annual survey shows.

The previous record was $1.194 trillion for the 12 months ended Sept. 30, 2007.

Among the Top 1,000 largest retirement plans, defined contribution assets rose 4.6% to $1.998 trillion.

Reflecting defined contribution's continuing popularity, the DC share of the P&I universe is rising. Defined contribution assets comprise 24.9% of the Top 200 and 29.8% of the Top 1,000 totals, compared with 24.4% and 29.1%, respectively, for the year-earlier period.

The most prominent DC plans among those in the Top 200 were 401(k) plans, with $422.1 billion in assets; 457 plans, $66.3 billion, and 401(a) plans, $43.7 million. The largest DC plan remains the Federal Retirement Thrift with assets of $281.4 billion, up 6.6% from the previous reporting period. It dwarfs the next largest defined contribution sponsor — International Business Machines Corp., with $34.5 billion.

A comparison of the aggregate asset allocation of DC plans in the Top 200 shows a drop in many popular asset classes in the year ended Sept. 30: domestic equities fell by 3.6 percentage points to 37.9%; international equities dropped 1.7 points to 6.7%; fixed income (excluding stable value) dipped by 0.3 point to 10.1%; and stable value dropped 1.6 points to 14.7%.

Those decreases were consistent when the asset mixes of corporate and public plans are looked at separately.

In fact, the only allocation showing an increase in the overall aggregate mix was cash, up slightly to 17.3% from 17%.

This was the first year P&I asked for target-date funds, inflation-protection securities and annuities in the asset mix, which could account for some of the drops.

Assets in target-date funds accounted for 9.6% of the aggregate DC mix. When broken out by category, they accounted for 9.5% of the asset mix for corporate plans; 5.4% for public plans and 5% for union plans.

Among corporate plans, sponsoring company stock has declined steadily since its five-year peak allocation of 25.8% for the period ended Sept. 30, 2007, less than two weeks before the Dow Jones industrial average hit a record of 14,164.53 on Oct. 9, 2007. For the latest reporting period, the allocation was 16.2%, a full percentage point lower from the year-earlier period.

“Company stock is not a diversified holding,” said Stacy Schaus, senior vice president and head of the defined contribution practice at Pacific Investment Management Co. LLC., Newport Beach, Calif. “Companies are communicating the need for diversification. Some are putting limits on it.”

The aggregate allocation percentage for all other equities — domestic and international, including real estate investment trusts — has declined almost steadily over the past five reporting periods. It was 36.3% in 2011, down from 38.6% in 2010 and from 42.5% in 2007.

For public DC plans, the aggregate equity allocation in 2011 was 46.7%, down from 50.2% in 2010 and from 54.4% in 2007.

Alternative investments, meanwhile, are finding their way into some defined contribution plans' investment options.

For example, Treasury inflation-protected securities grew to $7.3 billion in the latest survey, up 9% from the previous reporting period and more than double the $3.2 billion for the period ended Sept. 30, 2007. TIPS represented 0.7% of the asset mix among the corporate DC plans in the Top 200, and 0.5% for public DC plans.

Assets in REITs in the Top 200 stayed level at $2.5 billion in 2011 vs. 2010.

Commodities remained a small component of DC assets, accounting for $500 million of Top 200 plan assets as of Sept. 30, up from $145 million in 2007.

“We'll see more of these real-asset strategies to combat inflation in a packaged format,” said Kristi Mitchem, senior managing director and head of global defined contribution business for State Street Global Advisors, Boston. “You don't want participants chasing volatile assets like commodities” through a single fund.

Ms. Mitchem said the packaging of alternative investments provides “one easy-to-use inflation-hedging category” and “offers diversification relative to traditional equity and fixed-income investments.”

Alternatives are being used in target date funds, according to the P&I survey. The most popular is TIPS, which was cited by 41 DC plan executives. Twenty-three executives mentioned REITs and 18 identified commodities. Direct real estate, private equity and hedge funds also were cited as components in target-date funds. (This is the first time P&I asked executives about the use of alternative investments in target-date funds.)

Defined contribution plan investments in passively managed equities among the Top 200 rose to $209.2 billion in the latest survey, up just more than 1% from the previous reporting period. For the 12 months ended Sept. 30, 2007, at the height of the stock market boom, passive equities accounted for $229.4 billion, then fell to $178.9 billion for the 12 months ended Sept. 30, 2008.

Assets in passively managed bonds reached $43.1 billion in the latest survey, 2.5% below a year earlier but double the $21.5 billion for the 12 months ended Sept. 30, 2007.

Research by Aon Hewitt, Lincolnshire, Ill., indicates that although index funds are increasingly being used by DC plans, they are additions, not necessarily replacements for actively managed funds, said Pamela Hess, the firm's director of retirement research.

“There will be a continued emphasis toward indexing,” said Tom Kmak, the Kansas City, Mo.-based CEO of Fiduciary Benchmarks Inc. His firm provides sponsors of DC plans with comparisons of their plans' fees, service and design to a benchmark group of similar plans. “Some sponsors will try to get fees as low as possible, but I don't see a headlong rush to indexing.”

Robyn Credico, the Arlington, Va.-based senior consultant and defined contribution practice leader for North America at Towers Watson & Co., said DC plan executives' interest in index funds is more complex than a desire to save money.

For example, Ms. Credico said, if plans offer default options, such as target-date funds, “where participants aren't paying much attention, why offer them an actively managed option” instead of a passively managed option?

Stable value declined as a percentage of total asset allocation among DC plans in the Top 200 in the latest survey, but it remained the most popular fixed-income option; it had 21.5% of the allocation among corporate plans for the latest reporting period, down from 23.5% for the previous period and 24.3% for the 12 months ended Sept. 30, 2009.

There was a similar decline in stable value among public DC plans, to 23.1% in 2011, from 24.9% in 2010 and from 25.7% in 2009.

Defined contribution experts said plan executives' concerns about the costs of stable value options plus the investment restrictions placed by wrap providers — companies that guarantee investors will receive book value of the bonds within the funds — are tempered by the low returns of money market funds. They expect stable value to retain a prominent place in the DC plan lineup.

Fixed-income investments, excluding stable value, also play a big role in the largest public DC plans, reaching 15.1% of the asset mix in 2011 vs. 14.6% in 2010. The allocation has been rising since the 13% allocation in 2008.

Among large corporate plans, fixed income, excluding stable value, accounted for 8.4% of the asset mix in 2011 vs. 8.6% in 2010. Looking ahead into 2012, DC experts predict a greater push by plan executives for simplicity — trimming investment lineups or reorganizing them into tiers that best fit participants with different levels of investing knowledge.

In the P&I survey, the number of options among DC plans in the Top 200 ranged from eight to 210, with a mean of 24 and a median of 18, according to the 62 executives who responded to the question.