The P&I analysis reveals several broad trends last year:
- Passively managed equity assets fell less than their active counterparts in both domestic and international categories.
Domestic equity assets fared better than international equities as assets declined less.
Passively managed domestic fixed-income assets rose at a higher rate than actively managed domestic fixed income assets.
Target-date fund assets rose 2.8% to $1.48 trillion in 2018 and were up 133.5% over five years. Custom target-date fund assets slipped 0.8% to $137.3 billion, but they are up 155.8% over five years.
The broad asset categories from P&I's survey incorporate underlying assets from target-date and balanced funds, mutual funds, separate accounts and commingled funds such as collective investment trusts.
Although active domestic equity and passive domestic equity assets both fell in 2018, the latter has enjoyed such significant growth in recent years that it is poised to overtake the former.
For the 12 months ended Dec. 31, actively managed domestic equity assets dropped 9.5% to $1.52 trillion while passively managed domestic equity assets declined 6% to $1.49 trillion, according to the P&I survey. For the five years ended Dec. 31, passive domestic equity assets climbed a cumulative 65.6% vs. active domestic equity's gain of 4.6%.
A continuing bull market and greater fee fealty by plan sponsors are some of the reasons for the surge in passive investing, consultants said.
ERISA lawsuits challenging fees have prompted sponsors to offer more index funds, said Bradford L. Long, partner and research director of global public markets for investment consulting firm DiMeo Schneider & Associates LLC, Chicago. And if active managers, especially in areas such as large-cap domestic equity, cannot outperform respective indexes, sponsors will offer — and participants will choose — less expensive index funds, he added.
"For every one of my clients, they are looking to add more passive equity funds," said Martin Schmidt, principal at MAS Advisors, a defined contribution consulting firm in Chicago. "They are not looking to add more active equity funds."
Passively managed equity has done well because "it offers value for money and convenience," said Nick Nefouse, managing director, co-head of the LifePath target-date business and head of the defined contribution investment and product strategy at BlackRock Inc., New York. "You know what it is, and you can do it very cheaply."
Mr. Nefouse acknowledged the impact of ERISA lawsuits on some sponsors' actions. "Litigation is a driver, but that doesn't mean everybody looks for the lowest cost possible," he said.
BlackRock is the second-largest manager of passive domestic equity for DC plans. Its passive domestic equity assets declined 6.5% to $406.8 billion last year vs. $435 billion in 2017, in line with the overall trends identified by P&I. "Asset flows tend to follow markets," said Mr. Nefouse said.
The largest passive domestic equity manager — Vanguard Group Inc., Malvern, Pa. — ran counter to the national trend, as assets rose 2.6% to $737.2 billion last year vs. $718.8 billion in 2017.
Vanguard has benefited from sponsors' greater use of target-date funds, especially as qualified default investment alternatives, said James Martielli, the firm's head of defined contribution advisory services. Index-based target-date funds are "getting the lion's share of flows" vs. actively managed target- date funds among Vanguard clients, he said. Although sponsors are adding index-based investments, they aren't coming as replacements to active investments, he added.
Vanguard's recent annual analysis of client activity shows 63% of DC plans offered an "index core" last year, continuing a steady annual increase compared to 38% in 2009. During this period, the percentage of clients offering an index core and target-date funds rose to 59% from 29%.
Vanguard defines an index core as "broadly diversified index funds" for U.S. stocks, U.S. bonds and international stocks. "The definition includes index funds for large-cap U.S. stocks, intermediate or long-term bonds, and developed markets," according to Vanguard's report.
Vanguard remained the top provider of total internally managed DC assets with $1.04 trillion as of Dec. 31, a 4.2% gain for the year. BlackRock remained in second place with $829.8 billion, down 3% from the end of 2017.