Defined contribution money managers reported a record $7.09 trillion in U.S. institutional assets under management as of Dec. 31, up 17.4% from 2016, with the largest DC manager — Vanguard Group Inc. — passing the $1 trillion mark for the first time, Pensions & Investments' annual survey showed.
Managers' internally managed DC assets rose 16% to $6.18 trillion in the 12 months.
Among the 25 largest managers, most reported double-digit increases in DC plan assets in 2017, and the rankings of the 10 largest remained the same. In aggregate, the 10 largest managers reported $4.96 trillion in DC assets under management as of Dec. 31, up almost 22% from year-end 2016. Assets increased 10.9% for that group in 2016.
Angelo Auriemma, director of DC investments and a senior consultant at Chicago-based Pavilion Advisory Group Inc., pointed to the continued growth of target-date funds as a reason Vanguard and other large managers saw asset increases. Strong market performance also gave a boost, DC consultants said.
Last year was "a pretty Goldilocks year in terms of the total asset returns we saw for diversified portfolios that are in DC plans," said Ben Taylor, San Francisco-based senior vice president at Callan LLC.
When it came to the individual rankings, consultants were not surprised to see the same names at the top.
Michael Volo, senior partner at Cammack Retirement Group Inc. in Wellesley, Mass., said he believes consultants and managers who are looking at minimum fund sizes, long-term track records and other factors as part of their research are becoming "comfortable with a set of investment managers."
"As these consulting firms grow, more of their client bases grow, and more of (their) clients are using these same funds, and it kind of has a domino effect," Mr. Volo said. Ultimately, this makes it "harder for smaller investment managers to gain traction," he said.
David O'Meara, New-York based senior investment consultant at Willis Towers Watson PLC, said the largest managers benefit from having large teams dedicated to supporting their DC businesses.
According to P&I's latest survey, the five largest DC managers — Vanguard, BlackRock Inc., Fidelity Investments, Nuveen and T. Rowe Price Associates Inc. — accounted for 51.5% of the $7.09 trillion in DC AUM reported as of Dec. 31. The 10 largest managers accounted for 69.9% of the total.
Vanguard — which continues to rank as the largest manager of DC assets — reported $1.14 trillion in U.S. institutional tax-exempt DC assets as of Dec. 31, a 26.6% increase from year-end 2016. Vanguard is the first manager in P&I's survey to surpass $1 trillion in defined contribution assets. The Malvern, Pa.-based firm also is close to crossing the $1 trillion mark in internally managed DC assets, reporting $998.75 billion as of Dec. 31.
Pavilion's Mr. Auriemma cited investor demand for low-cost, passively managed target-date strategies as another contributor to Vanguard's growth story. "If you have a plan that is not a 403(b) and is large enough, you're getting down to single digits in terms of basis-point charges for some of these vintages in the Vanguard target-date series, and that's really attractive to plan sponsors," Mr. Auriemma said.
Along with attractive pricing, performance has driven the demand for passively managed strategies, Mr. Auriemma said.
"Even though we're starting to see a little bit of a sea change now, it (has) been a long run, particularly in U.S. equities, of passive strategies outperforming the active ones. ... It (has) become a lot more difficult to justify not being in an index series target-date-wise when you see that fees can be significantly lower, and I haven't been getting any alpha for a few years," he said.
According to a Morningstar Inc. survey of target-date mutual funds released May 7, about 95% of the $70 billion in estimated net inflows to target-date funds last year went to passively managed series. Since 2015, passive target-date net inflows have exceeded those for active series, according to Morningstar's survey.
Martha King, managing director and head of Vanguard's institutional investor group, said the firm benefited from the continued adoption of target-date funds along with plan sponsors' search for low-cost, high-quality investment options and its record-keeping business.
Plans hiring Vanguard as a record keeper generally have offered Vanguard funds "to a very great extent," Ms. King said.