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.
