Despite its growth, and projections for still greater increases, target-date funds still trail domestic equity by a wide margin in DC plan asset allocation, according to the P&I survey.
Among DC plans in the top 200, domestic equity slipped to 40.4% of total defined contribution assets vs. 41% in the year-ago period.
But a closer look at DC plan asset allocations by type of sponsor revealed that among corporate plans in the top 200, target-date funds surpassed company stock as the second-largest asset allocation.
Target-date assets accounted for 16.9% of corporate DC plans assets in the latest survey vs. 14.5 a year earlier. Employer stock's share fell to 13.9% from 15.9%.
Domestic equity remained the leader for corporate plan allocations, at 31.4%, dipping from 31.6% in the previous survey. Stable value remained in fourth place as its allocation fell to 13.5% from 14%.
For public DC plans among the largest retirement plans, stable value allocations dropped to 19% from 20.2% but still held onto second place. Target-date funds inched up to 16% from 15.8% to remain in third place. Domestic equity again was first, with 40.5% vs. 39.7%.
The reason for stable value's decline in asset allocation percentage could be as simple as target-date fund allocations - or other asset category allocations - taking a bigger piece of the DC pie. DC experts say stable value could be affected by some conflicting trends.
On the plus, the sources said they expect stable value to benefit from new regulations enacted by the Securities and Exchange Commission in October that place some restrictions on prime money market funds. On the minus side, demographic and plan design trends might work against stable value.
“I suspect that stable value lost at the expense of target-date funds becoming the default,” said Toni Brown, San Francisco-based senior vice president of defined contribution for Capital Group.
Target-date funds' dominance as the QDIA will “continue to eat away at stable value over the years because stable value may have been the prior default” before the Pension Protection Act was enacted in 2006, she said.
Stable value's share of asset allocation might stall or shrink, Ms. Brown said, because older employees who take their assets from DC plans upon retirement most likely had a relatively high percentage of their accounts in stable value.
Their younger replacements most likely will be defaulted into target-date funds or will choose a more aggressive equity allocation, she said. Investment re-enrollments will play a role in reducing stable value's prominence within specific plans, she added.
“Older people tend to be in stable value when they roll out of a plan,” agreed Russell's Ms. Verdeyen. “Stable value tends to be a legacy holding. Some plans have outsized allocations of stable value.”
Ms. Verdeyen forecasts “a decrease in prominence” for company stock in DC plan investment lineups, thanks to plan design strategies such as capping the amount of stock a participant can hold in a retirement account or freezing the amount of stock a company will contribute to its 401(k) plan.
Stock-drop lawsuits play a big role in plan executives' decisions. Although it might be cumbersome for plans to remove company stock as an investment option, she expects few plans will add company stock.
The largest DC clients of Northern Trust are stepping up their communications to participants about investment diversity and the risk of high concentrations of a single investment, said Ms. Bailey. For example, clients are targeting education efforts at participants owning more than 20% of company stock in their accounts.
During the past year, “only a handful” of clients made changes in their company-stock policy, primarily placing a cap on the amount a participant could own in a DC account, she said.