Overall assets jump nearly 22% for top 25 firms

Expanding defined contribution AUM last year was like shooting fish in a barrel for the largest money managers, as the top 25 firms enjoyed an aggregate gain of 21.65%, according to the latest annual survey by Pensions & Investments.

Last year's aggregate U.S. DC assets under management for these firms climbed to $7.31 trillion as of Dec. 31 vs. $6 trillion a year earlier.

The seven biggest fish in the DC sea accounted for 80% of those gains in assets under management. They were led by Vanguard Group Inc., up 29.1% from the end of 2018 to $1.52 trillion; BlackRock Inc., up 25.6% to $1.04 trillion; and Fidelity Investments, up 28.6% to $857.1 billion.

The other biggest players were Nuveen, up 3.6% to $526.2 billion; T. Rowe Price Group Inc., up 25.5% to $518.5 billion; Capital Group Cos. Inc., up 23.2% to $451.4 billion; and State Street Global Advisors, up 29.9% to $386.1 billion.

For all DC money managers, last year's U.S. AUM of $7.9 trillion was 18.1% higher than the $6.69 trillion at the end of 2018. Since Dec. 31, 2014, DC money manager assets under management have grown by 44.6%, compared to only 7.3% for U.S. defined benefit assets. Money managers and DC consultants acknowledge that a booming equity market played a big role in AUM gains. Consultants are quick to add that the managers that grew the most and are best positioned for future growth are those that offered lower fees and greater services; emphasized target-date funds; expanded the use of collective investment trusts and separate accounts; and invested in technology to make easier plan administration and participant access.

Significant AUM growth was reflected in companies that emphasized index investing but large active manager did well, too. Money managers that are also record keepers benefited from cross-selling products.

"They all have multiasset-class expertise," said Greg Ungerman, senior vice president and defined contribution practice leader for Callan LLC, San Francisco, who, like other consultants interviewed, declined to comment on specific companies. "They have size and scale across different asset categories."

Although index-based managers have flourished in rising markets, active managers can do well "if you have strong management in asset categories for proprietary products," he said. The bigger active managers "have done that."

The large money managers "have done a good job in communicating to sponsors and participants" about the value of their target-date funds," Mr. Ungerman added. As a result, "we don't see that much change" when a client issues an RFP for a target-date provider.

Because asset flows into qualified default investment alternatives remain extensive and because target-date funds dominate QDIAs, "it's not surprising" to see target-date funds playing a large role in DC money managers' AUM, said Jason Shapiro, New York-based director of investments and head of target-date and managed accounts research for Willis Towers Watson PLC. "I expect this to continue."

Target-date growth has been noticeable among the biggest firms whether they use an actively managed approach or an index-based strategy, said Ross Bremen, a partner in the Boston-based consulting firm NEPC LLC.

Target-date funds have benefited from — and will continue to benefit from — sponsors' use of auto features and QDIAs. "I expect flows to continue to target-date funds," said Mr. Bremen, adding that sponsors' push for lower fees means that "passive will continue to do well."

Examples of how powerful target-date franchises can succeed with either approach include T. Rowe Price Group, Baltimore, an active manager whose target-date funds accounted for 49% of total AUM last year. Target-date fund AUM for T. Rowe Price rose 31% to $255.7 billion.

"We were one of the leaders to launch the target-date business because we believed it was a better way to help plan participants invest for retirement, and this holds true today," said Chris Newman, head of Americas, in an email. "Plan participant adoption of target-date vehicles continues to grow." He didn't provide details or comment on the institutional DC performance during 2020.

The largest DC money manager and provider of target-date funds was Vanguard, where target-date funds represented 43% of DC AUM last year. Target-date AUM climbed 37% to $650.1 billion in 2019. Vanguard emphasizes passive management.

Martha King, managing director of Vanguard's institutional investor group, noted that target-date funds had a moderating effect on participants' trading during a period of volatile markets.

Between Feb. 19 and May 22, Vanguard reported that 4.5% of DC-only households traded during that time vs. 12.2% of all U.S. households with a Vanguard account, including taxable accounts and IRAs. Only 1.6% of DC-only target-date households traded during this period.

Ms. King said Vanguard is trying to expand its target-date franchise through greater use of collective investment trusts. "This offers more flexible pricing for our largest sponsors," she said. As of March 31, Vanguard's institutional DC business had $453 billion AUM in collective investment trusts. During the first quarter of 2020, total DC AUM fell 14.5% to $1.3 trillion from $1.52 trillion as of Dec. 31.

Thanks to their prominence as a QDIA, target-date funds have helped participants stay invested during market turmoil.

Monthly reports from Alight Solutions LLC, for example, showed that although target-date funds were the biggest source of trading outflows by participants during the height of the markets' meltdown, they also were the biggest source of contribution inflows due to auto features and QDIAs.

Data from Morningstar Inc. for January through April 2020 showed that the five DC money managers with the highest mutual fund target-date inflows were all part of the top group of DC managers: Vanguard, BlackRock, TIAA Investments (Nuveen), Fidelity and T. Rowe Price, with amounts ranging in descending order from $9.4 billion to $1 billion.

Callan's Mr. Ungerman said another source of AUM growth for the larger money managers is collective investment trusts, which can be cheaper than mutual funds and provide more flexibility when dealing with sponsors. "Relationship pricing is a positive for sponsors and participants," he said. "It's an effective way to reduce fees at the plan level."

At T. Rowe Price, there's been "greater adoption of CITs in the last five years," said Mr. Newman, who declined to provide details. "We have experienced significant internal transfers from mutual funds to lower priced CITs."

Collective investment trusts and separate accounts represent about 95% of all of Boston-based State Street Global Advisors' DC AUM, said David Ireland, senior managing director and global head of defined contribution.

"It's more efficient for sponsors and participants, and it's cheaper for us to administer," said Mr. Ireland, adding that this approach enables his firm to better address fee-compression trends in the DC arena.

"This is very much a size-and-scale game," he said. "If you don't have size and scale, you can't compete in a meaningful way."

The company's emphasis on passive investing includes about 22% of defined contribution AUM in low-cost index target-date funds.

Mr. Ireland said his firm is "equity-centric" — 80% of AUM is in equity. "It's where we have won business," he said.

The equity emphasis led to an approximate 17% decline in total DC AUM in the first quarter of 2020. "The drop was purely market driven," he said. "Our aggregate flows have been positive year-to-date."

Despite the stock markets' turmoil, "we saw participants staying the course," Mr. Ireland added. "This is a very long game."

DC consultants say the long-game practices by the largest money managers includes the willingness to spend heavily on technology to increase efficiency and to get a better understanding of participants' needs.

"We have seen asset managers take a more holistic view," Willis Tower Watson's Mr. Shapiro said, citing increased communication, the use of big data to better assess participant behavior and more interactive tools as ways to distinguish their services.

"The record keepers use big data to increase services and build a greater value proposition," he said. However, other large money managers can build their own processes or work with third-party partners to make greater investments in subjects such as population analytics.

Technological advances are expensive, which gives the largest firms an advantage if they are willing to invest, Mr. Shaprio said. "The cost of entry might be prohibitive" for many money managers.

The COVID-19 environment "is challenging from a business perspective" for smaller firms, added Mr. Ungerman of Callan.

Despite the biggest firms' advantages, other money managers are trying to boost their presence in the DC market.

Invesco Ltd., for example, increased its active management AUM by acquiring OppenheimerFunds Inc. last year. As a result, Invesco's total AUM rose in the P&I rankings to 12th place in 2019 with $138.7 billion vs. 15th place with $91.3 billion in 2018.

"One of the main reasons for our acquisition was to increase our footprint to get a seat at the table with larger clients," said Greg Jenkins, Dallas-based managing director and head of institutional defined contribution for Invesco. He declined to discuss details of the Oppenheimer AUM contribution or Invesco's first-quarter 2020 AUM.

One growth area for Invesco is stable value. With $31.7 billion in U.S. stable value last year, up 12% from 2018, Invesco is the fourth-largest provider in the U.S. institutional DC market. Stable value accounts for 23% of Invesco's total DC AUM.

"We're still seeing plans that held money market funds that are now switching to stable value," he said.

Nuveen, the investment arm of TIAA-CREF, views direct real estate as a way to "dampen volatility" in its conservative DC strategy, said Mike Perry, the New York-based head of U.S. advisory services.

Nuveen, the fourth-largest institutional DC money manager, has 5% of total defined contribution AUM devoted to direct real estate, 45% to equity and 50% to fixed income. Eighty percent of Nuveen's DC AUM is in actively managed investments. Nuveen's institutional DC AUM dropped about 10% in the first quarter.

The total DC AUM grew 3.6% in 2019, well below that of its peers. "We experienced growth in every asset class category in 2019," Mr. Perry said.

"We are the leading provider of fixed-income strategies and the market appreciation of fixed income was less in 2019 than that of equities."