Passive investment train overtakes active in corporate DC plans

The never-ending fight for lower fees and the fear of fee-related lawsuits have pushed passive investments ahead of active management among large defined contribution plans in 2015 - the first time since Pensions & Investments began tracking data from the 100 biggest corporate plans.

Among companies identifying management styles, P&I found passive management accounted for 51.8% of assets in 2015, while 48.2% were actively managed. That's a flip from 2014, when active management accounted for 51.5% and passive, 48.5%. In 2013, the active to passive split was 54.7% and 45.3%.

P&I has analyzed data since 2013 covering U.S.-based companies, both public and private, but excluding mutual companies. Separate company DC plans in Puerto Rico are excluded. The latest data is based on companies' filings with the Securities and Exchange Commission and Department of Labor, primarily for 2015 plan years.

P&I also found that collective investment trusts took a bigger piece of the asset-allocation pie, as DC consultants noted that fees are sparking plan executives' interest in CITs at the expense of mutual funds. The actions identified in the P&I data match observations of DC experts, who said these trends have marched past 2015 and will advance in the near future.

The growth in passively managed assets and CITs occurred as total DC assets slipped by less than 1% to $1.118 trillion in 2015 from $1.128 trillion in 2014.

“It's not a surprise due to all of the litigation,” said consultant Jennifer Flodin, referring to greater allocations to passively managed investments. She was referring to lawsuits accusing plan sponsors of breaching their fiduciary duties by not using or considering lower-cost investment options.

In their investment lineups, “sponsors have been offering a passive sleeve to give more choice,” said Ms. Flodin, the Chicago-based managing director and co-DC practice leader for Pavilion Advisory Group Inc.

Plans have added passively managed investments because “there's been a greater scrutiny on fees and more interest,” said Winfield Evens, a partner at Aon Hewitt Associates, Lincolnshire, Ill. “In our view, there's a role for both. No matter what you are using, pay attention to fees.”

The DC research landscape is filled with surveys showing how lower fees over time affect record keeping and investment management. However, DC plans aren't the only arena for combat over fees. Some public pension plans are eliminating or reducing exposure to hedge funds because executives believe the fees are too high and the returns are too low. In the U.K., money managers are cutting fees as they try to retain local government pension-scheme clients that are consolidating.

Among companies identifying investment vehicles, collective investment trusts rose again, grabbing 56.7% of assets in 2015 vs. 54.3% in 2014 and 50.3% in 2013. Mutual funds accounted for 33.2% of assets, down from 35%, while separate accounts represented 10% of assets, slipping from 10.6% in 2014. In 2013, mutual funds had 36.5% of the assets and separate accounts, 10.9%.

“This is in line with what we see among our clients,” said Mr. Evens. Companies' motivations for offering CITs include offering investment options that can be less expensive - though not always - than mutual funds and a greater interest in passively managed investments. “Passive is a big driver in collective investment trusts,” Mr. Evens said.

Among Aon Hewitt's record-keeping clients, which tend to be larger DC plans, 39% of DC assets were in CITs by the end of 2016 vs. 14% in mutual funds and 47% in separate accounts. The latter includes multiple subadvisers combined into a single investment option for participants, company stock funds and the hiring of an asset manager to employ a strategy for a specific asset class.

Collective investment trusts will secure more DC plan assets as the CIT providers offer more products and as they reduce the minimums required by plans to participate in CITs, said Jeri Savage, the partner in charge of defined contribution research at Rocaton Investment Advisors, Norwalk, Conn. “Years ago, you had to be a $1 billion plan,” she said. “Now, you can be a $100 million plan.”

Ms. Savage and other industry members said target-date funds will take ever-greater allocations among 401(k) plans. The explosive popularity of target-date funds as qualified default investment alternatives, auto enrollment and participants' desire for a “do-it-for-me” approach to investing all have contributed to the funds' growth.

Before the Pension Protection Act of 2006, “sponsors were reluctant to use multiasset funds,” said Mr. Evens, referring to the increase in target-date fund allocations. In Aon Hewitt's quarterly survey of 401(k) plans with a total of $160 billion in assets, target-date funds accounted for 24.1% of total assets by year-end 2016 vs. 23.1% at the end of 2015.

P&I's broader survey of the top 100 DC plans showed target-date funds securing $120 billion, or 10.7% of assets in 2015 vs. 9.5%, or $106.6 billion, in 2014. In 2013, target-date funds' share of total assets was $87.8 billion, or 8.2%. Target-date funds represented the third-largest asset group in 2015.

Target-date funds “continue to grow, driven in most part by plan design strategies to get investors in the right place,” said Sue Walton, a Chicago-based senior vice president of defined contribution for Capital Group. Auto enrollment, auto escalation and re-enrollment all contribute to target-date funds' greater popularity, she said.

Among other prominent asset categories in P&I's data analysis:

• The largest allocation was to domestic equity, which accounted for $319.17 billion, 28.6%, in 2015, vs. $334.12 billion (29.6%) in 2014 and $321.57 billion, or 30.1%, in 2013.
• Company stock slipped to $200.55 billion in 2015, or 18% of total assets, the next largest allocation. Company stock represented 19% of assets in 2014 and 19.4% in 2013.
• Allocations to stable value accounted for 9.7% of total assets in 2015 vs. 9.4% in 2014. With 2015 assets of $108.9 billion, stable value was the fourth largest asset category.
• Fixed income fell to 8.4% of total assets in 2015 from 9.2% in 2014.
• Brokerage windows and alternative investments remained tiny components. The former accounted for 2.6% of all assets in 2015 and 2.5% in 2014. The latter represented $1.8% in 2015 and 1.8% in 2014.

Among the biggest of the big DC plans, Boeing Co., Chicago, rose to first place with $47.9 billion in defined contribution plan assets in 2015 from second place in 2014, swapping positions with International Business Machines Corp., Armonk, N.Y., which had $46.9 billion in 2015.

AT&T Corp., Dallas, kept third place with $36.55 billion; Wells Fargo & Co. San Francisco, held onto fourth place with $35.8 billion; and Lockheed Martin Corp., Bethesda, Md., stayed in fifth with $31.8 billion.

The rest of the top 10 were: Bank of America Corp., San Francisco ($29.4 billion), whose sixth place ranking was unchanged from 2014; General Electric Co., Boston, ($28.6 billion), which moved to seventh from eighth in 2014, trading places with Verizon Communications Inc., New York ($28.3 billion); United Technologies Corp., Farmington, Conn. ($21.7 billion), which stayed in ninth place; and J.P. Morgan Chase & Co., New York ($20.9 billion), which advanced to 10th in 2015 from 12th in 2014. Wal-Mart Stores Inc., Bentonville, Ark., 10th place in 2014, slipped to 11th in 2015 with $20.56 billion.