Vanguard vaults past Fidelity in total DC assets

Vanguard jumped past Fidelity to become the largest manager of U.S. defined contribution assets, a post Fidelity had held since 1998, Pensions & Investments' annual survey of money managers shows.

Only about $1 billion separates the two powerhouses. Vanguard Group Inc., Mal-vern, Pa., reported $613.47 billion in DC assets as of Dec. 31, and Fidelity Investments, Boston, $612.39 billion.

Vanguard's defined contribution assets surged almost 28% in 2013, compared to a $16.9% gain for Fidelity.

Vanguard's DC assets doubled since 2009; Fidelity's rose 35.4%, according to P&I data.

P&I has been tracking money managers' defined contribution assets since 1997, when TIAA-CREF, New York, was the leader. A year later, Fidelity began its winning streak. The P&I survey counts U.S. institutional tax-exempt DC assets, excluding assets held in custody, in company stock or under record-keeping contracts.

Defined-contribution consultants said Vanguard's DC AUM growth is due primarily to industry trends of plans offering more index funds and target-date funds — two strong points for Vanguard

“Vanguard has done a fantastic job of establishing its brand as the "vanguard' of low-cost indexing,” said Jacob O'Shaughnessy, adviser at Arnerich Massena Inc., Portland, Ore. “Vanguard has done a better job (than other fund companies) of leveraging its products and brand across many record-keeping platforms.”

Mr. O'Shaughnessy said Vanguard's reputation plays into several trends, including the desire by DC plan executives to reduce fees, thanks in part to federal fee disclosure regulations that took effect in mid-2012. He also cited plan officials' concerns about fee-related lawsuits. “From a fiduciary standpoint, there is a perceived benefit to offering index funds,” he said. “A lot of litigation is around underperforming (actively managed) funds.”

Consultant Martha Tejera said in her experience, if plan executives “have a preconceived notion about focusing on fees and passive investing, Vanguard has a stronger reputation” than other service providers.

But for those executives concentrating “on more comprehensive services and a broader approach to investments, Fidelity has the stronger reputation,” said Ms. Tejera, project leader at Tejera & Associates LLC, Seattle, which provides investment and management consulting to DC plans.

“Passive investing is less expensive, and passive offers less fiduciary risk,” she added. “Passive investing is Vanguard's sandbox.”

Consultant Jennifer Flodin said she believes target-date funds have been the “big driver” in Vanguard's rising AUM. “Vanguard has strong brand recognition,” said Ms. Flodin, co-founder and chief operating officer of Plan Sponsor Advisors, Chicago, an investment and benefits consulting firm.

Despite its gain last year, “Fidelity (officials) recognized performance was below their own expectations with target-date funds, and they have adjusted their portfolios to achieve performance objectives,” said Ms. Flodin.

Fidelity's efforts include reducing index target-date series fees and making some glidepath alterations, she said. “There is recognition that something had to change,” she added.

Michael Shamrell, a Fidelity spokesman, said Fidelity executives declined to comment.

Ms. Flodin also noted that Vanguard has benefited from DC plan executives' growing interest in open architecture — the unbundling of investment options from record keeping. “There has been acceptance of Vanguard funds on other record-keeping platforms,” she said.

Vanguard's low-fee approach has led to its investment options being offered by DC plans for which other service providers are record keepers, said Mike Alfred, CEO and co-founder of BrightScope Inc., San Diego, which rates retirement plans.

For example, Vanguard's investment options — primarily mutual funds — accounted for about 8.5% of assets of plans in which Fidelity was record keeper in 2012, the latest available data for BrightScope shows. BrightScope reviewed audited financial statements for DC plans with more than 100 participants.

By contrast, Fidelity's investment options — also primarily mutual funds — represented less than 1% of the assets in investment menus among plans with more than 100 participants for which Vanguard was record keeper, Mr. Alfred said.

Also, Fidelity was investment manager for about one-third of the assets in plans for which it was record keeper in 2012 among plans with more than 100 participants, Mr. Alfred said. Vanguard funds represented about 70% of assets in the DC plans for which it was the record keeper.

Christopher McIsaac, managing director and head of Vanguard's institutional investor group, said his company has capitalized on what he called the “dominant themes” of the DC industry in recent years — a “broad adoption” by DC plans of index funds and of target-date funds. He declined to comment on Vanguard's growth vs. that of Fidelity.

Vanguard also has benefited from the unbundling of defined contribution plans, a trend Mr. McIsaac calls “an industry transformation.” He wouldn't quantify his firm's success in managing assets for plans for which it isn't a record keeper.

“There is still tons of growth potential across the board,” he said.