In an equity bull market approaching its 11th year anniversary, it was the performance of bonds in the 12 months ended Sept. 30 that provided the best market growth for defined contribution plans, according to Pensions & Investments' annual survey of the largest U.S. retirement plans.
For the 12 months ended Sept. 30, index bond assets rose to $59.2 billion, up 17.9% from the previous survey period for DC plans among the 200 largest retirement plans. Passive equity assets rose only 0.1% to $539.3 billion.
However, over a five-year period, index bond assets advanced 30.1% while passive index equities gained 43.4%. The recent bond bonanza period included the fourth quarter of 2018, when equity markets were slaughtered as the S&P 500 index lost 13.97%. For the year ended Sept. 30, the Bloomberg Barclays U.S. Aggregate Bond index was up 10.3%, while the S&P 500 ended up 4.25%.
During the P&I survey period, among corporate DC plans in the largest 200 U.S. retirement plans, the allocation to fixed income rose to 6.1% vs. 5% a year earlier. Stable value took 10.5%, up from 10.1% and inflation-protection securities edged up to 0.6% from 0.5%.
For public plans, the results were similar: fixed income rose to 6.2% from 5.5%; stable value advanced to 15.6% from 14.8%; and inflation-protected securities rose to 0.4% from 0.3%.
However, some research indicates that participants' purchasing of fixed-income funds is a strategic rather than a panic response.
Among 401(k) plans' trading inflows last year, 55% went to bond funds, 27% went to stable value funds and 13% went to money market funds, said a report of the Alight Solutions 401(k) index.
The index reflects daily investment activity of more than 2 million 401(k) plan participants who have about $200 billion in retirement assets; it defines trading flows as moving assets from one asset class to another.
Asset classes with the most trading outflows were large-cap U.S. equity funds (49%), company stock (34%) and small-cap U.S. equity funds (8%).
"This activity seems to suggest that people were rebalancing their portfolios (but) not making drastic changes to their investment mix," said the Alight report. Last year, 401(k) participants "largely took a more thoughtful and less reactionary approach to investing than in past years."
Callan LLC, San Francisco, noted that during the three months ended Sept. 30, "U.S. fixed income saw the largest inflows for the quarter (57.7%), the first time this has occurred since the third quarter of 2010," said a report on the firm's quarterly DC index.
The largest percentage of outflows for the quarter came from U.S. large-cap equity (52.2%) and U.S. small/midcap equity (19.1%), "perhaps signaling investors' desire to shift to relatively safer asset classes," Callan said.
Consultants and researchers say the strategic reasons for boosting bond balances vary from participants doing some profit-taking to older participants seeking to reduce risk.
"I think it's partly due to rebalancing," said Drew Carrington, senior vice president and head of the institutional defined contribution business at Franklin Templeton Investments, San Mateo, Calif.
Some participants are saying, "I had a good run so I'll take a little off the table" from equities, he added. Others are saying "I'm older so I am looking for less risk." The S&P 500 index gained 30.4% for the 12 months ended Dec. 31.
More assets going into fixed income also might reflect plans' decisions to offer more fixed-income options because plans' menus often tilt heavily to equity vs. fixed income, said Wylie Tollette, executive vice president and head of client investment solutions for Franklin Templeton's multiasset solutions group.
Emily Wrightson, who focuses on public DC plan clients, said she has seen "more of a focus" by clients on actively managed fixed-income options due to low interest rates. Still, her clients offer both active and passive fixed-income options, said Ms. Wrightson, a New York-based vice president at Cammack Retirement Group.
P&I data shows that some corporate sponsors with the biggest amounts of passively managed bonds experienced healthy passive bond asset gains, according to the P&I survey.
The Federal Retirement Thrift Investment Board, Washington, reported a 19.3% increase in index bonds to $33 billion vs. the previous survey out of total DC assets of $601 billion for the 12 months ended Sept. 30. Its passive bond assets were nine times larger than the second-biggest user of index bonds, International Business Machines Corp., Armonk, N.Y., whose index bond assets rose 11% to $3.6 billion out of total DC assets of $53.6 billion.
Northrup Grumman Corp., Falls Church, Va., reported $2.8 billion passive bonds, a 19.52% increase over the previous survey. Total DC assets as of Sept. 30 were $29.2 billion.
"We see a split" in sponsors' fixed-income strategies, said Winfield Evens, the Charlotte, N.C.-based vice president investment solutions and strategy for Alight Solutions. Passive funds have lower fees but actively managed funds can offer better results in a low-interest-rate environment. "I don't see sponsors kicking out actively managed (fixed-income) funds," Mr. Evens said.
