Vanguard widens lead over rivals; BlackRock gains on Fidelity

Vanguard Group Inc. stretched its lead as the largest manager of U.S. defined contribution plan assets in Pensions & Investments' annual money manager survey.

Fidelity Investments remained in second, after losing the crown in 2013, but BlackRock Inc. is gaining on it.

Malvern, Pa.-based Vanguard reported $705.5 billion in U.S. institutional tax-exempt assets under management for defined contribution clients in 2014, a gain of 15% from year-end 2013, P&I survey data show.

Boston-based Fidelity recorded DC assets under management of $620.2 billion, up 1.3%, while third-place BlackRock, New York, had $584.8 billion in defined contribution AUM as of Dec. 31, rising 10% from 2013.

Overall, DC assets overseen by managers in P&I's universe rose 2.5%, to $5.35 trillion in 2014.

The stronger performance for Vanguard and BlackRock vs. Fidelity “has everything to do with passive management,” said Michael W. Kozemchak, managing director at Institutional Investment Consulting in Bloomfield Hills, Michigan.

“The momentum is in passive management,” he added. “Vanguard and BlackRock have done a solid job. Fidelity has been slow to the party in passive management.”

Vanguard's gains were due to a combination of market appreciation and greater interest by plan executives in target-date funds and indexed investing, said Martha King, managing director and head of Vanguard's institutional investor group.

Some “significant” new record-keeping contracts among large DC plans — and the providing of Vanguard investments to these clients — also contributed to the AUM gains, she said. The record-keeping wins were with plans of more than $1 billion in DC assets, she said, but declined to provide details or the names of new clients.

“There are increasing opportunities at the large end of the market,” said Ms. King, who in March succeeded Christopher McIsaac as head of the institutional investor group. Mr. McIsaac will become managing director of Vanguard's planning and development division, replacing Michael Miller, who will retire midyear.

One source of growth has been Vanguard Retirement Plan Access, a program for DC plans with assets of less than $20 million. Started in 2011, it covered more than 2,600 plans and approximately 127,000 participants by the end of last year — up from 1,400 plans and 60,000 participants for year-end 2013. AUM for this program reached $6.7 billion at year-end 2014.

BlackRock's 10% AUM advance reflected market appreciation, new business, an increase in target-date fund assets and an increase in index fund assets, said Anne Ackerley, managing director and head of BlackRock's U.S. and Canada defined contribution group. BlackRock achieved gains “across the board” among various DC-plan sizes, said Ms. Ackerley, declining to provide details.

She said indexed equity and indexed fixed-income assets rose, adding that BlackRock executives have talked to clients about “rethinking fixed income,” to provide “great flexibility” in a low-interest rate environment on the threshold of expected interest-rate increase by the Federal Reserve.

Some retirement plans have added Treasury inflation-protected securities, unconstrained bonds and “maybe some real estate” to their DC investment menus as a component of target-date funds or as stand-alone options, she said. “Our target-date funds already have TIPS and real estate,” she said.

Ms. Ackerley said she expected target-date fund assets to grow, noting that “off-the-shelf is probably right for most people.” A majority of BlackRock's target-date fund AUM is in off-the-shelf products.

However, Ms. Ackerley also predicted an increase in customization of target-date fund glidepaths. “In the last two years, some of our larger clients have chosen custom,” she said.

Fidelity saw growth in smaller-client markets, said Stephanie Pierce, executive vice president, Fidelity Investments, referring to defined contribution plans with $75 million or less in total assets.

The number of small-market clients rose to 18,960 in 2014 from 17,600 in 2013, and the number of participants in these plans was 3.3 million in 2014 vs. 3.1 million in 2013. Fidelity didn't provide AUM figures.

“We have more work to do in target-date funds,” said Ms. Pierce, noting Fidelity made several “enhancements” to its target-date fund series last year, such as raising the equity allocations for most of the portfolios. There were decreases in other asset classes, especially short-term debt.

Fidelity also added an active asset allocation to its target-date series strategy, allowing portfolio managers to make certain incremental changes in allocation to major asset classes — such as equity funds, bond funds and short-term debt funds — relative to specific fund glidepaths.