Defined contribution plan money managers reported a surge in passive assets under management last year compared to 2015, according to Pensions & Investments' latest survey of these managers covering U.S. institutional tax-exempt assets.
Passive domestic equity assets climbed 14.3% to $1.24 trillion for the year ended Dec. 31, 2016, while passive domestic fixed income jumped 31.7% to $300.7 billion.
These numbers reflect internally managed assets, and they played the dominant role in overall internally managed assets rising 9.5% to $5.25 trillion in 2016 vs. 2015. Total DC assets under management gained 8.6% to $5.95 trillion during this period.
For both internally managed and overall DC assets, last year's gains reversed the slight declines in the previous survey covering 2015, when internally managed DC assets slipped by 0.9% and total DC assets fell by 1.1% from the 2014 figures.
DC consultants said they weren't surprised by the gains in passive domestic equity assets, noting plan sponsors and participants are embracing index funds for reasons that include disappointment with active managers, efforts to reduce fees and strategies of adding a passive equity component to complement an active equity offering.
"Participants want less expensive funds," said Martin Schmidt, principal at HS2 Benefits in Chicago. "They are asking for a more economical fund lineup."
The Department of Labor's rules on fee transparency plus fee-related lawsuits brought under the Employee Retirement Income Security Act have played a role in sponsors' actions, too, said Douglas M. Balsam, principal and director of institutional consulting for DiMeo Schneider & Associates LLC, Chicago.
"There's a greater feeling of comfort for the fiduciaries" when offering index funds, said Mr. Balsam, adding that sponsors are more willing to terminate an active manager that has struggled for several years to outperform benchmarks. Actively managed domestic equity assets fell by 2% to $1.32 trillion last year, according to the P&I survey.