Participant inaction minimizes losses

Last year's market meltdown didn't derail certain DC trends and didn't trigger new ones, said Emma O'Brien, the Boston-based senior consultant for the NEPC LLC defined contribution team.

Clients maintained their long-term perspective, Ms. O'Brien said, adding that the industry doesn't make quick changes.

"What will drive changes is target-date funds" at the expense of core menu options, she said.

An NEPC survey in March found that target-date funds accounted for 46% of clients' DC assets vs. 54% for core options. In 2011, the percentages were 28% and 72%, respectively. The survey of 12 record keepers covered 207 DC plans with $283 billion in DC assets and 2.2 million participants.

Sixty-three percent of contributions into clients' DC plans now enter target-date funds, said Ms. O'Brien, adding that passive investments are playing an expanding role in clients' lineups.

Ms. O'Brien said there were "no significant trends in outflows" from DC plans last year. In 2023, some clients will review their investment structure, a typical client response.

"We've heard limited feedback from plan sponsors that participants are asking for change in lineups, and that's driven by the fact that our clients generally have well-structured investment menus that offer core menu options that span the risk spectrum," she said. "Participants have the option to be conservative, aggressive, or somewhere in between based on their own goals or their market views."

Stock and bond markets played havoc with defined contribution assets last year, depressing every investment vehicle, plan type, specialty mandate and virtually every investment strategy, according to the Pensions & Investments' annual survey of the largest money managers.

In aggregate, total DC assets under management fell 16.8% to $8.43 trillion in 2022 vs. 2021's record performance of $10.13 trillion, based on U.S. institutional, tax-exempt assets.

Last year's results halted the momentum of steady annual AUM gains since 2018. Still, the 2022 AUM was 19.1% higher than five years ago. Most investment strategies also posted gains over the five-year period.

"In some ways, 2022 was a one-off year," said Bradford L. Long, the Chicago-based partner and deputy chief investment officer of Fiducient Advisors, noting that participation rates and deferral rates among DC clients were essentially stable.

Participants seemed to shrug off the fact that the S&P 500 index fell 18.1% and the Bloomberg U.S. Aggregate Bond index slumped 13% last year.

"The power of inaction" meant participants didn't make dramatic changes, and the cautious nature of the DC industry meant that sponsors asked questions but didn't make big changes, he said.

Based on what happened in 2022, "there are more conversations about the high-interest-rate environment" and investment strategies such as money market funds, stable value funds and short-term bond funds, he said.

Despite the investment declines, last year was "more of what we have seen over several years," said Mike Volo, the Boston-based principal and financial adviser for CAPTRUST Financial Advisors. "Clients are staying the course. Participants are staying the course."

Mr. Volo predicted clients "will play a pat hand" in 2023.

In 2022, however, asset managers were dealt a bad hand, thanks to stock- and bond-market returns being joined at the hip.

Cash was a winner last year among significant allocations in the P&I universe, gaining 13.5% to $210.7 billion.

Investors' interest appears to be continuing this year.

"Today, we are more comfortable with investors holding cash than we have been in 20 years," wrote Phillip R. Nelson, the Boston-based partner and head of asset allocation for NEPC LLC, in a June 14 note to clients.

For DC investors, however, cash accounted for only 2.5% of the total assets last year, according to P&I data.

After cash, it was pretty much all downhill. Even cash's closest conservative cousin, stable value, dropped 10.1% last year to $352.8 billion in U.S. institutional, tax-exempt assets.

Mutual funds, commingled investment trusts and separate accounts all reported lower AUM. So did exchange-traded funds, which are only a sliver of institutional DC assets.

All equity allocations — domestic, non-U.S., global — suffered AUM declines in double digits regardless of whether they were used active or passive strategies. The results ranged from passive U.S. equity (down 14.8%) to active global equity (down 26.4%).

The largest fixed-income components — active U.S. and passive U.S. — were down 8.6% and 11.9%.

A smaller component — active global/non-U.S. fixed income – was down 14.9%. A tiny asset category — passive global/non-U.S. fixed income — was up 22%.

All of the largest asset managers experienced falling AUM.

First place Vanguard Group Inc. dropped 12.8% to $1.78 trillion. Second place BlackRock Inc. was off 16.3% to $1.16 trillion. Fidelity Investments held onto third place despite a 17.6% slide to $987.8 billion.

State Street Global Advisors moved into fourth place from fifth place last year only because its AUM decline was less than the AUM plunge for T. Rowe Price Group Inc. State Street Global Advisors AUM fell 9.6% to $555 billion. T. Rowe Price's AUM sank 21.8% to $542.7 billion.

Among the largest asset managers, the exception was Empower Investments, which jumped to 11th place from 22nd. Assets climbed to $137.7 billion from $66.1 billion, primarily due to its April 2022 acquisition of Prudential Financial's retirement plan business, Stephen Gawlik, an Empower spokesman, wrote in an email.

Market performance eroded SSGA's DC assets under management last year, but the firm still scored $40 billion in net inflows, thanks to its target-date funds and index funds, said Brendan Curran, the Boston-based head of defined contribution, Americas. Most net flows were due to new clients.

Discussions with sponsors focused on reviewing target-date funds, especially vintages for participants at or near retirement, examining inflation risk and menu diversification and exploring the offering of multiasset funds in plans' core lineups, Mr. Curran said.

The latter can be a combination of real estate investment trusts, Treasury inflation-protected securities, commodities, infrastructure, direct real estate and natural resources. "This is still in the review stage, but we would expect an uptick in the next six to 12 months," Mr. Curran said.

Clients are now reviewing "where were the cracks (in 2022) and how to protect participants going forward," he said. "We have to look at the defined contribution market on a long-term basis."

Clients of Capital Group "are still in the tail end of the taking-a-breather phase," said Ralph Haberli, the Los Angeles-based president of the company's institutional retirement group. Sponsors weren't looking to make changes, although there had been some increased discussions about retirement income options.

The sponsors' goal is to "keep participants invested through different (economic) times," he said. "If you rode out the ups and downs over the last two years, you did relatively well."

Mr. Haberli said net flows for Capital Group's DC business were "just about flat" last year, with gains coming from new clients, employees hired by existing clients, "strong inflows" into target-date funds and rising contributions by existing participants over time. Outflows were attributed to participants leaving DC plans and the spending down of assets by retirees who remained in their company's plans.

For Capital Group, which remained in seventh place, last year's defined contribution AUM was $483.3 billion, down 17.8% from 2021. Its target-date component was $208.7 billion, down 7.5% from 2021. Capital Group was the fifth largest target-date fund provider last year.