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Special report: Mutual funds most used by DC plans

Vanguard once again leads pack among managers of mutual funds

Morningstar’s David Blanchett

For the fourth year in a row, Vanguard Group Inc. was the largest manager of mutual funds for U.S. defined contribution plans, Pensions & Investments' latest survey shows.

The Malvern, Pa.-based manager reported $770.2 billion in proprietary mutual fund assets as of June 30, up 7.5% from the previous year. Second-ranked Fidelity Investments reported $578.5 billion in proprietary DC mutual fund assets as of June 30, a 10.3% increase from 2017. Fidelity has ranked second since 2015.

The rest of the top five ranking has also remained unchanged since 2015: Capital Group Cos. was ranked third with $387.9 billion in assets as of June 30, up 15.5% from a year ago, followed by T. Rowe Price Group Inc. at $250.7 billion, up 7%; and J.P. Morgan Asset Management (JPM) at $104.3 billion, up 5.1%.

In aggregate, the 25 largest managers of mutual funds reported $2.907 trillion as of June 30, up 7.4% from June 30, 2017.

Inflows to target-date strategies continue to rise at an impressive pace. DC assets in proprietary target-date strategies have nearly doubled in the last four years. As of June 30, assets totaled $1.53 trillion, up 18.3% from the previous year's total of $1.293 trillion. The June 30 totals for 2016, 2015 and 2014 were $1.035 trillion, $952 billion and $816 billion, respectively.

The top five target-date managers accounted for $1.2 trillion of the total of $1.53 trillion as of June 30 and held the same spots they've held since the 2015 survey. Vanguard led the way again, reporting $469.6 billion in proprietary assets, up 23.9% from a year earlier; Fidelity with $211.1 billion, up 12%; T. Rowe Price Group Inc., $205.3 billion, up 18.3%; BlackRock (BLK) Inc. (BLK), $203.2 billion, up 21.5%; and J.P. Morgan Asset Management (JPM), $114.2 billion, up 13%. (Mutual funds, commingled trusts and separate accounts are included under the target-date total.)

David Blanchett, head of retirement research, Morningstar Investment Management, Chicago, said in a telephone interview that Vanguard's faster pace of growth is not surprising.

"I really think Vanguard's asset share will continue to maintain. I wouldn't be surprised to see ... Fidelity's and the T. Rowe Price's decline because they're not as popular on non-Fidelity and non-T. Rowe Price platforms," Mr. Blanchett said.

Vanguard Group has been the beneficiary of automated features as it has supplanted Fidelity Investments atop of the list of mutual funds used by DC plans.

"The thing that continues to be similar as prior years (is) ... the power of default and the growing amount of automation," said Scott Conking, principal and head of institutional investor services at Vanguard Group, in a telephone interview.

"I think generally," Mr. Conking said, "we are really pleased with the direction the defined contribution environment is going because one of the things that is really important to us is that participants get in the plan, they save, and they invest, diversified, for a long period of time. The trends are very,very positive."

Capital Group, which offers the American Funds family, ranked sixth and reported by far the largest growth in target-date funds for the year ended June 30 —a 47.7% jump from the previous year to $86.7 billion in proprietary target-date assets.

Sue Walton, Chicago-based senior defined contribution strategist at American Funds, said in a telephone interview that the success of the company's single target-date fund series comes down to an emphasis on creating "the best outcomes for the strategies."

"It's an eye toward keeping participants in plans, making sure those strategies work beyond that target date, 20 to 30 years into retirement," Ms. Walton said, noting that the series' glidepath is managed 30 years into retirement.

"It's managing for that longevity risk," Ms. Walton said. "People are living longer, health-care costs are on the rise. Adding that additional 50 basis points or that 1% over the long term is going to have a meaningful impact."

While target-date funds in general continue to see impressive growth, the area getting more attention is passive target-date fund lineups, reflecting sponsors' greater attention on costs.

"One of the biggest trends in target-date funds has been the increasing shift from active to passively managed funds," said David O'Meara, New York-based director of investment services at Willis Towers Watson PLC, in a telephone interview. "Even within our client base, over 80% of our clients are implementing their target-date funds through passive."

"They're being very mindful of fees, so we're seeing that price compressions in target-date funds as they compete for assets under management," Mr. O'Meara said, "and that's not only within passive where their pricing has gotten to be very, very competitive. Also, the active series are now looking at that and have to compete with those very, very small fees on passive series."

"(One manager) only offered a purely active target-date funds suite and now they're rolling out active/passive blend suite or they've added a passive series."

Because they have to be so mindful of fees, target-date funds have been hesitant to add new asset classes, Mr. O'Meara said. "Any asset classes by their nature are more expensive to invest in, one of which being emerging markets debt, which a lot of managers have looked at, have evaluated there might be some marginal improvement (in performance). (But) it's harder to implement passively or at a low cost."

P&I's survey also looked at the average allocation of proprietary DC mutual funds, finding that domestic equity continues to have the greatest allocation at 42.1% (vs. 41.3% on June 30, 2017), followed by:

  • Target-date mutual funds at 23.9% (23.8%).
  • International/global equity, 12.5% (12.3%).
  • Domestic fixed income, 9% (9.5%).
  • Balanced/asset allocation, 7.9% (8.4%).
  • Money market, 3.3% (3.4%).
  • Other, 1.3% (1.3%).