Assets increase 12% to $4.23 trillion

Defined contribution assets under management jumped to a record $4.23 trillion in 2012, nearly 12% more than the previous record of $3.78 trillion in 2011, according to Pensions & Investments' latest survey of money managers running DC assets.

Internally managed assets climbed to $3.89 trillion, up 12.4% from 2011. The latest survey was based on responses from 242 companies; the 2011 survey covered 261 companies.

The five money managers with the greatest amount of assets from defined contribution plans accounted for about 47.7% of total DC assets under management in the P&I survey, and the top 10 represented 68.5%.

All of the top 10 managers enjoyed AUM gains but some grew faster than others, leading to several shifts in the rankings. Vanguard Group Inc., Malvern, Pa., advanced to second place from third, thanks to a 14.1% gain to $429.9 billion. Vanguard swapped places with TIAA-CREF, New York, whose AUM rose 4.2% to $425.9 billion.

Vanguard's gains reflect a “broader adoption” of index funds and target-date funds, said Chris McIsaac, managing director and head of Vanguard's institutional investor group.

Last year, 66% of new money going into Vanguard's defined contribution business was invested in target-date funds and trusts, he said. During the first six months of 2013, he said, 73% of participants' money entering DC plans has been invested in target-date funds.

“This is a dominant theme for our DC business,” Mr. McIsaac said. In addition, he said more DC plans are offering index funds as part of their core investment lineup.

Vanguard still has a long way to go to catch Fidelity Investments, Boston, whose $523.9 billion AUM represented a 10.7% improvement from 2011.

Fidelity executives have detected a greater interest among participants in what they call blended investments — target-date funds, target-risk funds and balanced funds — said Beth McHugh, vice president of market insights.

Among corporate DC clients, 25% of new retirement money going into Fidelity products was in blended investments in 2008, rising to 37% last year — and 39% in the first quarter of 2013. Meanwhile, conservative investments — fixed income and stable value — received 18% of new money last year vs. 19% in 2008, she said. The Pension Protection Act of 2006 and the role of qualified default investment alternatives “is driving much” of the gains in blended investments, she said.

Prudential Retirement, a unit of Prudential Financial Inc., Newark, N.J., continued its march up the rankings ladder as it forged into fifth place with $223.2 billion, up 17.2% from its sixth-place finish in 2011. Prudential was in seventh place in 2010, eighth place in 2009 and ninth place in 2008.

Despite its steady advance over the years, Prudential will have to produce spectacular gains — or buy a company — to catch No. 4 BlackRock Inc., New York, which has moved within striking distance of No. 3 TIAA-CREF. BlackRock posted AUM of $415.3 billion, up 18.3% from 2011.

As was the case in last year's survey, Prudential's gain was paced by its expanding the part of its stable value business in which it sells wrap insurance and asset management to third parties, said Jamie Kalamarides, senior vice president and head of institutional investment solutions. “It's been the biggest contributor to overall growth,” he said.

Despite the prospects of rising interest rates, “that doesn't reduce the need for fixed income” in participants' portfolios, said Mr. Kalamarides, adding there has been an increasing demand for “unconstrained” bond investments — those with fewer constraints on duration, credit quality and geography.

Prudential traded places with Capital Research and Management Inc. Los Angeles, which bounced back from a poor 2011 and grew 9.2% to $214.6 billion, placing it in sixth place.

The rest of the Top 10 rankings remained the same as each manager posted a gain over 2011: Seventh place Pacific Investment Management Co., Newport Beach, Calif., had AUM of $206.9 billion, up 19.2%; State Street Global Advisors, Boston, hung on to eighth place with AUM of $194.1 billion, up 15.6%; ninth-place T. Rowe Price Group, Baltimore, had $183.6 billion, up 25.5%; and Invesco Ltd., Atlanta, remained in 10th with $81.9 billion, up 8.6%.

See the complete rankings in the P&I Research Center

Northern Trust Corp., Chicago, almost cracked the Top 10, with $79.4 billion, vaulting to 11th from 14th in 2011 when it had AUM of $64.3 billion. That 23.4% leap was due to organic growth, said James Danaher, managing director for defined contribution solutions. Northern Trust's DC assets have more than doubled since 2009.

Mr. Danaher said 60% of the growth between 2011 and 2012 was attributed to more business from existing clients and 40% was due to new clients.

He attributed the growth to more sponsors using collective investment trusts - his firm's specialty - as well as index-based investments either as stand-alone core funds or through target-date funds.

“Sponsors are spending more time getting participants to focus on asset allocation,” he said.

In the P&I survey, assets reported in pooled/commingled investment vehicles rose 14% to $1.31 trillion in 2012, while separate account assets rose 3% to $694.2 billion and mutual fund assets rose 15%.

The allocation of internally managed assets shifted a bit among several broad categories. The fixed-income component, excluding stable value, grew to 23.8% from 22.3%, while the equity allocation inched up to 53.7% vs. 53% a year earlier. The allocation to stable value dropped to 12.7% from 14.9%, and cash declined to 4.7% from 5.2%. The allocation to alternatives barely moved — to 1.4% from 1.3% — and “other” investments rose to 3.7% from 3.3%.

Consultant Donald Stone said the decline in the overall stable value allocation is most likely because investors are putting more into equities rather than less into stable value. “We're not seeing any change in behavior at the plan level” among his clients, said Mr. Stone, managing partner and chief investment officer at Plan Sponsor Advisors, Chicago. “We're not seeing anyone stepping away from stable value.”

Mr. Stone said he detected some movement to emerging markets equity and developed international markets equity from domestic equity. As for the fixed-income allocation gain in 2012, Mr. Stone added that although “a lot of investors moved into bonds in 2012, this year hasn't been so good” for bond funds.

Mr. Stone also suggested that fixed-income allocations are rising as more people choose target-date funds, which adjust individual allocations to more conservative investments as participants grow older.

Among respondents to P&I's survey, total target-date assets surged to $426.7 billion, up 25.5% from 2011. Custom target-date assets rose 20% to $27.5 billion.

Jacob O'Shaughnessy, an adviser at Arnerich Massena Inc. Portland, Ore., said he didn't see any mass movement out of stable value by his firm's DC clients. Participants have been moving into equities, and some have left stable value for fixed-income investments such as money market funds and low-duration bond funds.

Making a move out of stable value can take time, so plans that dropped stable value in 2012 could have been working on a transition to another option, he said.

Because stable value still provides a better return than money market funds, Mr. O'Shaughnessy said those DC executives dropping stable value are doing so because “there is less fiduciary effort and concerns” than in offering options such as money market funds.

He expects plan participants will move funds to equity from fixed income, especially if the bond market appears less certain. “Participants will say "If I can lose money in fixed income, maybe I should invest in equities,'” he said. n