Leading the charge in 2016 is Vanguard Group Inc., Malvern, Pa., which enjoyed a 22.8% increase in total assets from U.S. institutional defined contribution clients to $903.6 billion.
“There's been an increasing awareness and concern about fees,” said Kathryn Himsworth, a principal and head of institutional record keeping in the Vanguard institutional investor group, describing why Vanguard's index business is growing.
“There's been a continued acceleration in target-date funds, said Ms. Himsworth, adding that last year target-date funds accounted for six of every $10 that came into Vanguard's retirement business.
Target-date funds and passively managed investments propelled BlackRock Inc.'s DC AUM last year to $692.3 billion in 2016 — up 13.8% from 2015.
Target-date fund growth occurred primarily among index-based target-date funds, said Anne Ackerley, the New York-based managing director and head of U.S. and Canada defined contribution for BlackRock. “There's been very nice growth in stand-alone index funds.”
Ms. Ackerley said BlackRock's index-related investments have done well in recent years thanks to strong stock market returns, which have been “pretty robust,” especially in domestic equity, and to the low costsof index funds.
Custom target-date funds will be a source of future growth as sponsors ask “is there something I can do to get a better outcome,” she predicted. The key to custom target-date success will be designing products that take into account a sponsor's unique workforce characteristics, such as demographics and employee retirement patterns.
BlackRock's 2016 performance put more daylight between the company and third-place Fidelity Investments, Boston, which had DC AUM of $620.2 billion.
In 2015, BlackRock moved to second from third, squeezing past Fidelity. Last year, the gap widened as BlackRock's 13.8% AUM growth outpaced Fidelity's AUM gain of 2.2%.
In addition to Vanguard and BlackRock, DC consultants said beneficiaries of greater sponsor interest in index-based investments included State Street Global Advisors, Boston, whose DC AUM rose 15.1% in 2016, and Northern Trust Asset Management, Chicago, whose DC AUM gained 16.4% last year.
“Passive management is gaining momentum,” said Martha Tejera, project leader of DC consulting firm Tejera & Associates, Seattle. “Research shows it's hard for active managers to outperform benchmarks.”
Sponsors' perception of litigation risk due to suits claiming excessive fees has affected their investment choices, she added. Money managers that capitalize on sponsors' increasing interest in white label funds also should benefit from increased business as they subadvise investment lineups, she said.
“There's been a large turn toward passive,” said Matthew Porter, the Chicago-based principal and director of research analytics at DiMeo Schneider & Associates. Passive investments are often cheaper and, in recent years, many have outperformed their active investment peers, he said.
Fears of ERISA litigation also prompt sponsors' actions, he added. “Sponsors want to have lower-cost options,” even though the Department of Labor doesn't require plans to offer the lowest-price investments, he said. “Plans want to give participants a choice between active and passive.”