Vanguard tops in DC target-date assets

Vanguard overthrew Fidelity, becoming the largest manager of target-date assets in defined contribution plans, Pensions & Investments' data show.

As of June 30, Vanguard Group Inc., Malvern, Pa., managed $180.9 billion in proprietary target-date strategies for defined contribution plans, a 41.6% increase from a year earlier and $14.44 billion more than Boston-based Fidelity Investments. Fidelity reported $166.46 billion as of the same date, up 12% from the previous year.

Earlier, Vanguard had leaped over Fidelity to become the largest manager of U.S. defined contribution assets (Pensions & Investments, June 6).

Fidelity still ranked No. 1 among managers of defined contribution assets in mutual funds, with $547.5 billion, up 13% from the previous survey. Fidelity has ranked first since P&I started the survey in 1994. Vanguard remained in second place in that ranking, but narrowed the gap, with $526.8 billion, up 19.4%. In the year-earlier survey, Vanguard trailed Fidelity by $44 billion.

“We're seeing real accelerated growth within the defined contribution channel,” said Chris McIsaac, managing director of the institutional investor group at Vanguard.

“The trend of unbundling record keeping from investment management over the past 10 years has allowed plan sponsors to choose the funds as they see fit, independent of who they choose as their record keeper,” Mr. McIsaac explained. “That's opened up a lot of opportunities for a lot of investment managers.”

This trend of unbundling, Mr. McIsaac said, has in turn led to defined contribution plans moving toward index funds and target-date funds. Vanguard has benefited from this trend.

Mathew Jensen, director of target-date strategies at Fidelity Investments, said in an e-mailed response that Fidelity has “seen a real focus by plan sponsors on understanding and evaluating the investment objective, underlying assumptions, investment process and glidepath construction.

“We've also seen an increased focus on designing the defined contribution plan for specific investor outcomes to help ensure investors can maintain a 25- to 30-year retirement,” Mr. Jensen added.

Vanguard's jump in target-date assets is part of an overall growth among those strategies.

The top 20 managers of proprietary target-date strategies used by DC plans in P&I's survey had a total of $793 billion in DC assets as of June 30, up 32% from the previous year.

“Although I see a lot of discussion (among DC plans) about doing custom target-date funds, we're still seeing the preponderance of plan sponsors using off-the-shelf target-date solutions,” said Jennifer Flodin, a senior consultant and defined contribution practice leader at Plan Sponsor Advisors in Chicago. “Even plans that could do custom target-date funds don't, because there's a perceived enhanced risk ... given all the moving parts from an operational and cost perspective.”

Ms. Flodin added, however, that it is possible to “outsource a fair number of the risks.”

Target-date funds “meet the needs of plan sponsors and they're an effective way for managers to deliver a diversified portfolio to the end investor,” said Scott David, head of U.S. investments services for T. Rowe Price Group Inc., Baltimore. T. Rowe's proprietary target-date strategies jumped 38% to $114.5 billion as of June 30, placing fourth in that ranking.

“Between auto enrollment and auto escalation, you're seeing a pretty big driver of DC assets,” said Lori Lucas, the Chicago-based executive vice president and defined contribution practice leader at Callan Associates Inc. “Target-date funds are really the receptacles for DC assets coming from automatic enrollment.”

The 25 largest managers of defined contribution mutual fund assets reported an aggregate of $2.31 trillion in proprietary-fund assets as of June 30, a 16% increase from the $1.99 trillion a year earlier, according to the latest survey by Pensions & Investments.

“The defined contribution market itself is growing,” said Chip Castille, managing director and head of BlackRock Inc.'s U.S. retirement group, New York. The money management giant had $54.41 billion in assets from DC plans in mutual funds as of June 30, up 9% from the year before.

“You're continuing to see plan sponsors move from defined benefit plans to defined contribution plans, and that train continues to roll,” said Craig Russell, managing director, head of the Americas institutional client business at Goldman Sachs Asset Management, New York. GSAM had $19.14 billion in DC assets in mutual funds, up 20% from the year before.

The ranking of the top five managers — whose AUM accounted for 74% of the total DC mutual fund assets managed by the top 25 managers in P&I's survey — remained unchanged from the year before.

Following Fidelity and Vanguard, Capital Group Cos. Inc., Los Angeles, which offers the American Funds family, remained in third place with $264.6 billion, up 15.6%. T. Rowe Price, remained at fourth place with $201 billion in DC mutual fund assets, up 34.5% from the previous survey. And Pacific Investment Management Co. LLC, Newport Beach, Calif., retained the No. 5 spot, although it reported a 7.7% drop in its mutual fund assets to $130.05 billion.

T. Rowe Price's Mr. David said the firm has benefited “from trends in the defined contribution industry,” such as auto enrollment, the use of target-date funds as a qualified default investment alternative and increased participant contributions.

“We've made several investments to expand the reach of our distribution efforts to work with many more record keepers and advisers who focus on defined contribution plans,” Mr. David said, citing efforts within the past five years to increase the firm's DC sales teams, connections with outsourced record keepers and its own record-keeping business.

“Over the last five years, we've invested more in (its DC investment-only business). That expansion has started to pay off,” Mr. David added.

John Miller, a managing director at PIMCO and head of the firm's U.S. retirement business, said he's seeing fixed income deliver value, even if clients are currently turning elsewhere.

On the decline in assets, Mr. Miller said: “Risk assets significantly outperform lower-volatility asset classes. We had a massive ramp-up in the equity market vis-a-vis the bond markets and (there was) an asset shift as a result. You see this from cycle to cycle.”

He added: “Clearly, the momentum is with passive providers, due to low cost. But we believe that trend will run its course and a dialogue about value will re-emerge. If it were simply about cost, there'd be segments of the market that wouldn't be as large as they are, and fixed income is an area where value is being delivered.”

With $101.1 billion in DC assets as of June 30, the PIMCO Total Return Fund is the largest U.S. fixed-income mutual fund used by DC plans. “That's a result of delivering consistent value to our participants,” Mr. Miller said.

Greg Wilson, managing director, head of the North American subadvisory and platform distribution group at GSAM, also has seen increased demand for fixed income from DC plan participants.

“Fixed income has been our biggest area of growth as plans look for fixed-income diversification because of the impending rise of interest rates,” Mr. Wilson said. He added that GSAM has seen “some success in unconstrained fixed income.”

The overall growth in DC mutual fund assets is coming from the smaller and midsize plans, both because more sponsors of smaller defined benefit plans are making the switch to defined contribution, but also because larger plans typically invest in collective investment trusts and separate accounts.

“The smaller plan is where you're seeing the adoption of mutual funds,” BlackRock's Mr. Castille said.

T. Rowe Price's Mr. David agreed. “The largest pension plans tend not to use mutual funds,” he said. “The mid- and small-size market is really where the growth has come from.”

Peter Gallagher, director of retirement and platform sales at Invesco Ltd., said “mutual funds have always been the vehicles of choice in the DC space. To be successful in gathering assets, the key has been strong, long-term performance.”

The Atlanta-based firm's DC assets reached $40.04 billion in mutual funds as of June 30, up 46.5% from the year before.

“We've been fortunate to have strong performance in stable value, U.S. value strategies and international capabilities,” Mr. Gallagher said on Invesco's growth in the DC business.

Also reporting growth of more than 40% from the year-earlier survey was Dimensional Fund Advisors, Austin, Texas, up 44.4% to $29.06 billion as of June 30.

Stephen Clark, vice president and head of global institutional services at Dimensional Fund Advisors, said “several factors have led to” the firm's growth in DC assets, from fee disclosure rules leading to a “shift toward more competitively priced portfolios” and the firm gaining new clients as a result; educating the marketplace; and strong performance.

“It all comes back to the whole package,” Mr. Clark said. “There was no one thing.”

P&I's survey also ranks managers of custom target-date strategies, and BlackRock dominated that category with $26.41 billion, up 302% from last year.

“We have a special position in the target-date space in that we invented the target-date fund in 1993,” Mr. Castille said. “The largest plans have chosen our target-date funds, and we're continuing to see strong interest.”