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  2. DEFINED CONTRIBUTION
August 10, 2015 01:00 AM

Target-date rush pushes assets of DC money managers to record

Increasing popularity of investment option boosts total DC assets 7% for year, exceeding $5.5 trillion

Robert Steyer
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    Tott Eckelman
    Jacob O'Shaughnessy believes re-enrollment and automatic plan features are big factors behind target-date fund growth.

    Target-date fund assets surged more than 28% last year, helping produce record-high defined contribution assets under management, according to Pensions & Investments' annual survey of DC money managers.

    Overall DC assets under management rose 7% in the year ended Dec. 31 to $5.52 trillion from a year earlier. Internally managed assets rose 6% to $4.82 trillion in that period.

    Total target-date fund assets climbed to $811.2 billion in 2014 from $632.3 billion in 2013. The subset of custom target-date AUM jumped 63.4% to $87.7 billion. Other asset-allocation strategies grew 23% in the year, to $188 billion.

    Money managers and DC consultants said the rise in target-date fund assets is a product of greater willingness among participants to accept a professionally managed investment option and the growing popularity of target-date funds as a qualified default investment alternative.

    Jeffrey Levy, managing partner at Cammack Retirement Group, New York, said greater investments in target-date funds have played a role in rising equity allocations, especially for the younger participants whose target-date investments are heavily weighted to that asset class. “Some people are riding the market,” he said. “Most people are not changing their allocations.”

    P&I's survey showed equity allocations climbed to 66% last year from 63% at year-end 2013, yielding the largest equity component since Pension & Investments began tracking defined contribution money manager AUM in 1995.

    In addition, consultants say target-date funds have benefited from plan executives' decision to re-enroll participants as a way of promoting more diversified portfolios vs. extreme investment allocations, most notably a heavy reliance on fixed income, stable value and money market funds.

    “The industry is doing a better job of communicating about target-date funds,” said Martin Schmidt, principal at HS2 Solutions, Chicago, a retirement plan and technology consulting firm. “Participants are more aware and more comfortable about target-date funds. More are using it as a default.”

    Consultant Jacob O'Shaughnessy said the increased use of auto features and re-enrollment contributed to the greater role of target-date funds among his clients.

    “From my experience there is an increased confidence from sponsors and the legal community” to use re-enrollment as a tool to encourage participants to diversify their holdings, said Mr. O'Shaughnessy, an adviser at Arnerich Massena Inc. in Portland, Ore.

    He added that participants who might have been heavily invested in equities begin reviewing their investment strategies as they approach retirement. “They say, "I don't want 2008 to happen again,' and they look at their fund menu,” he said. “They will switch to a target-date fund because it's a way to make sure their portfolio is appropriate.”

    Mr. Schmidt said rising equity allocations are a mixture of market appreciation and participants taking action. “Some people are chasing returns because they are late to the party,” he said.

    The survey doesn't measure how much of the equity allocation gain was due to a rising stock market and how much was due participants' actively moving more money into equities.

    “My gut says it's more due to surfing the market,” Mr. O'Shaughnessy said. “Most of the money will ride the wave up and will likely ride the wave down.”

    As the equity component went up last year in the P&I survey, fixed income went down to 18.1% from 19.9% in 2013, the lowest level since 2007. The stable value allocation declined to 8.1% from 8.9%, producing the lowest level during P&I's research.

    For other broad categories, cash slipped to 3.6% from 3.9%; alternatives remained level at 0.2% and “other” declined to 4% from 4.1%.

    The overall allocation percentages in 2014 are affected by Pacific Investment Management Co. LLC, Newport Beach, Calif. In previous years, PIMCO provided detailed information on many categories of its DC assets under management. For 2014, however, it provided only an aggregate number.

    Top 5

    Among the largest managers:



    1. Vanguard Group Inc., Malvern, Pa., remained in first place with $705.5 billion in assets for 2014, up 15% from a year earlier. In 2013, Vanguard moved into first place, barely beating Fidelity Investments. Last year, however, Vanguard widened the gap between the two. Vanguard's AUM growth was due in part to more participants' choosing its target-date fund and indexed investments.

    2. Fidelity Investments, Boston, held onto second place with $620.2 billion, adding 1.3% in the year. Fidelity noted a gain in small-market clients — those with DC assets of $75 million or less.

    3. BlackRock Inc., New York, strengthened its grip on third place with $584.8 billion, up 10%. BlackRock received a boost from indexed equity and fixed-income products as well as off-the-shelf target-date funds.

    4. TIAA-CREF, New York, kept its fourth-place ranking with $409.1 billion, up 3.7% from the $394.5 billion in 2013, based on a revision to how TIAA-CREF calculates AUM; and

    5. T. Rowe Price Group Inc., Baltimore, vaulted into fifth place from eighth, with $289.4 billion in AUM, representing an 18.8% increase from its year-end 2013 figure of $243.5 billion.

    Scott David, head of U.S. investment services for T. Rowe Price, said his firm benefited from sponsors unbundling services that helped the firm's investment-only business, as well as T. Rowe Price's expansion in recent years to marketing through advisers. There has been “significant” target-date fund growth “as more people accept the QDIA as their investment choice,” he said.

    “The category is expanding,” Mr. David added, noting that as more millennials use target-date funds, equity allocations are playing a larger overall role in these options.

    Target-date funds helped State Street Global Advisors, Boston, increase DC assets to $273.2 billion, as it advanced to sixth place from seventh, a gain of 11.4% for the year.

    “Our target-date mandates have seen the most growth,” said Fredrik Axsater, senior managing director and global head of defined contribution at SSgA. The target-date growth has been aided by sponsors' use of this option as a QDIA, he said. According to SSgA data, off-the-shelf target-date fund AUM grew 41% last year.

    Among alternative investments, real assets in DC plans grew 62% last year, according to SSgA data. Real assets — commodities, real estate, infrastructure and Treasury inflation-protected securities — is a small component of SSgA's defined contribution AUM. Mr. Axsater did not provide details.

    P&I's survey shows alternatives continue to play a tiny role in overall DC assets under management. Consultants and asset managers said these investments are best suited as components of target-date funds or multiasset funds.

    A 'diversifier'

    “Alternatives are more of a diversifier as part of a target-date fund strategy,” said Mr. Schmidt. “They're a small component within the target-date fund. I'm not seeing them as a stand-alone investment.”

    Among other managers in the top 10:



    1. Capital Group Cos. Inc., Los Angeles, posted AUM of $265.1 billion, virtually unchanged from the $264.6 billion, pushing its ranking down to seventh from fifth
    2. .
    3. Prudential Financial Inc., Newark, N.J., fell to eighth from sixth place as its AUM dropped 12.7% to $225.9 billion.

    4. Pacific Investment Management Co. LLC, Newport Beach, Calif., remained in ninth place, but its AUM dropped 19.6% to $154 billion.

    5. J.P. Morgan Asset Management, New York, advanced to 10th place from 11th, as its AUM climbed 40% to $153 billion from the $109.3 billion at year-end 2013.

    “The key area was the target-date franchise, both off-the-shelf products and continued traction in the megamarket for custom target-date funds,” said John Galateria, managing director and head of North America institutional for J.P. Morgan Asset Management. “Auto features are taking hold at a greater level.”

    Mr. Galateria said plan executives and their consultants are becoming more amenable to re-enrollments because “they can move more participants into a well-diversified professionally managed product,” such as a target-date fund.

    Vanguard had the most internally managed defined contribution assets with $584.95 billion, barely pushing ahead of BlackRock, which had $584.83 and surging ahead of Fidelity Investments, which reported $537.1 billion. In 2013, Fidelity ranked first, BlackRock was second and Vanguard was third.

    Last year, Vanguard's internally managed AUM grew 17.1% and BlackRock gained 10%, but Fidelity declined 3.7%.

    Among various categories of internally managed assets tracked by P&I, Vanguard was the leader for 401(k) plans, profit-sharing plans and deferred compensation plans. TIAA-CREF had the highest amount of 403(b) plan assets while BlackRock managed the most assets in 401(a) plans.

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