Money manager DC assets up 21% to $5.2 trillion in 2013

Bolstered by a soaring stock market, defined contribution assets under management climbed to $5.19 trillion last year, a 21.1% increase over the previous record of $4.28 trillion in 2012, according to Pension & Investments' annual survey of DC money managers.

Internally managed DC assets rose 18.1% to $4.65 trillion last year vs. $3.94 trillion in 2012 for U.S. institutional tax-exempt assets. The latest survey was based on responses from 261 companies; the previous survey covered 251 companies. Nine of the top 10 DC money managers produced AUM gains. Only Pacific Investment Management Co. LLC, Newport Beach, Calif., suffered a decline — down 7.5% to $191.4 billion last year vs. $206.9 billion in 2012. All types of DC plans posted AUM gains for assets managed internally. The largest category — 401(k) plans — rose by 31.4% to $2.76 trillion.

Assets for the category of balanced/asset allocation — a combination of target-date funds, custom target-date funds and balanced funds — advanced by 35.9% to $788.4 billion from 2012 for assets managed internally.

Most of this category belonged to target-date funds, whose $632.33 billion in internally managed assets last year represented a 36.9% increase from 2012. Custom target-date fund assets jumped 95.5% to $53.67 billion.

Although most of the largest DC money managers posted asset gains, many had such strong performances that each of the top 10 firms changed rankings in 2013 vs. 2012.

As P&I reported May 26, Vanguard Group Inc., Malvern, Pa., advanced to first place with $613.47 billion in total DC assets, replacing longtime leader Fidelity Investments, Boston, which reported $612.39 billion. Although Fidelity's AUM rose 16.9% from 2012, Vanguard's AUM jumped 27.9%.

Fidelity had been the overall leader since 1998. Vanguard was the leader in several internally managed plan categories at the end of 2013 — 401(k) plan assets, moving up from second place in 2012 to overtake Fidelity; profit-sharing assets, retaining first place; and 457 plan assets, advancing from third in 2012.

Vanguard also led several major internally managed asset categories: retaining the top spot for passive domestic equity and passive domestic fixed income, while surpassing Fidelity for balanced/asset allocation strategies.

Solely for target-date fund assets managed internally, Vanguard ($154.24 billion) was in a virtual tie with Fidelity ($154.55 billion) in 2013, narrowing the gap from 2012 when Fidelity reported $131.7 billion in assets vs. Vanguard's $106.4 billion.

Fidelity remained the leader in 2013 in institutional DC assets managed internally, DC assets in mutual funds managed internally and DC active domestic equity assets managed internally.

BlackRock Inc., New York, charged into third place after assets were up 28% to $531.67 billion, moving up from fourth place in 2012. TIAA-CREF, New York, swapped with BlackRock to fourth place, even though last year's $472.1 billion in assets represented a 10.8% gain from 2012.

Last year, BlackRock was the internally managed leader in 401(a) plan assets, separate account assets and indexed international equity assets. BlackRock's recent gains and future prospects are tied primarily to target-date funds and passively managed funds, said Chip Castille, managing director and head of BlackRock's U.S. retirement group.

“Target-date funds give you disciplined asset allocation,” said Mr. Castille, who declined to discuss gains among his firm's various business categories. “We're not trying to follow market activity for our business strategy; we are trying to follow our clients' needs.”

Among the other changes in the Top 10:

Capital Group Cos. Inc., Los Angeles, moved to fifth from sixth with assets of $264.6 billion. In 2013, Capital Group consolidated the reports of two companies, Capital Research & Management and Capital Guardian Trust. Assets increased 22.1% last year for the two companies that reported a combined $216.7 billion in AUM in 2012.

Capital replaced Prudential Financial Inc., Newark, N.J., which dropped to sixth from fifth with $258.8 billion in AUM, a gain of 15.9% from 2012.

State Street Global Advisors, Boston, advanced to seventh place from eighth as assets rose 26.4% to $245.4 billion. T. Rowe Price Group, Baltimore, moved into to eighth place from ninth after a 32.7% asset gain to $243.54 billion.

PIMCO's decline in DC assets led to a drop in the rankings to ninth from seventh.

“Risk assets significantly outperformed lower volatility asset classes in 2013,” John Miller, managing director and head of PIMCO's U.S. retirement business, said in an e-mail. “Our mission remains clear for DC plan participants: Find the best investment opportunities that will produce consistent returns for investors saving for retirement, while managing risk and keeping volatility low.”

J.P. Morgan Asset Management, New York, climbed to 10th place from 13th due to a 43.3% advance in assets to $109.3 billion, the largest percentage gain among the top 10 managers. Invesco Ltd., Atlanta, slipped to 12th from 10th even though assets rose 10.7% to $90.72 billion.

John Galateria, head of North America Institutional at J.P. Morgan Asset Management, said asset growth was the result primarily of strong performances in the firm's target-date funds, large-cap domestic equity funds and core fixed-income funds. He declined to provide specific figures.

Mr. Galateria added that asset gains have come not only from its institutional DC business but also from its DC adviser-sold business.

Acknowledging the volatility of equity markets, Mr. Galateria said J.P. Morgan seeks to maintain its asset-growth momentum in part by its target-date fund emphasis. “Research shows that target-date fund investors tend to stay with their strategies even during turbulent markets,” he said. “The industry is moving toward more assets in target-date funds.”

There was just as much movement among the next group of 10 DC money managers as the top 10.

In this group, nine changed rankings from last year. Northern Trust Asset Management, Chicago, was the only firm among the top 20 that kept the same ranking — 11th place — but it hardly stood still. DC assets rose 32.5% to $105.23 billion.

The impact of the stock market on DC assets under management — the S&P 500 was up 32.4% in 2013 — was apparent by the changing mix of internally managed DC assets in the P&I survey. Last year, the equity allocation was 61.6% vs. 54% in 2012.

As the equity component climbed, fixed income fell to 20.1% from 23.7%. The stable value allocation sank to 9.1% from 12.5%. The combined allocation of cash, alternative investments and other investments was 9.2% last year vs. 9.8% in 2012.

The big jump in the equity allocation should serve as a signal to DC plan executives and participants to be vigilant about portfolio diversification and asset allocation rebalancing, said Lorie Latham, a Chicago-based senior investment consultant for Towers Watson & Co.

“Market cycles come and go,” she said. “We encourage DC plan sponsors to take a holistic perspective rather than market timing. This is the right time to evaluate the effectiveness of your exposure to equities.”

For example, Towers Watson recommends that DC plan explore so-called white label funds and multimanager portfolios to reduce risk and volatility, she said.

“The typical participant will ride the market up and ride the market down,” said Matthew Rice, principal and chief investment officer of DiMeo Schneider & Associates LLC, Chicago, an investment consulting firm.

Even before equity allocations rise significantly, he said plan executives should be educating participants about rebalancing, realizing that “inertia is the most powerful force in the world.”

Beware of “allocation momentum,” he added. “Unless there's a rebalancing, it will pull portfolios up and down.”