Pandemic mars an otherwise strong year

Shrugging off the coronavirus' damage to the economy and stock market, asset managers serving the defined contribution industry posted AUM gains for their mutual funds and target-date series for the 12 months ended June 30, an annual survey by Pensions & Investments reveals.

Total proprietary mutual fund assets under management rose 2.2% to $3.26 trillion vs. the year-ago period. Over five years, mutual fund AUM grew by 31.5%.

Total target-date AUM climbed to $1.91 trillion for the 12 months ended June 30, up 12.5% for the year-ago period and double the AUM from five years ago.

These gains were achieved essentially, in poker parlance, due to sponsors' playing a pat hand with their investment lineups and plan designs due to the coronavirus.

"Prior to the market decline as a result of the pandemic it was largely business as usual for many committees," said Ryan Gardner, the Windsor, Conn.-based managing partner and senior consultant for DiMeo Schneider & Associates LLC. "As the market decline unfolded and into the summer months, many committees elected to defer non-critical changes and/or other changes to their investment menus. I suspect we will start to see normal levels of activity as we get closer to year end and into the new year."

The coronavirus "has absorbed benefits staff with the CARES Act," Martha Tejera, project leader of the DC consulting firm Tejera & Associates LLC, Seattle, wrote in an email, referring to the Coronavirus Aid, Relief and Economic Security Act.

"Investment committees have had to deal with increased market volatility and shifts between investment strategies," she wrote. "Senior management has had to address other workforce issues that arose with COVID. So there has been limited capacity by plan sponsors to do anything creative or innovative during 2020."

Ms. Tejera added that she hoped that the impact caused by the coronavirus "will ease in 2021 and we will see progress with helping workers be financially prepared for retirement."

The DC asset management industry's performance for the 12 months ended June 30 benefited in general from a paucity of participant panic.

"Even though there have been wild swings on Wall Street in 2020, most 401(k) participants have stayed the course with their retirement savings behaviors," Robert Austin, the Charlotte, N.C.-based director of research for Alight Solutions, wrote in an email.

"The average participation rate in plans slipped only marginally from 81% in 2019 to 80% in the second quarter of 2020," he wrote. "Average savings rates increased slightly from 8.1% to 8.2%, likely due to the impact of automatic contribution escalation."

Although there was "brisk" net trading activity during the first quarter of 2020, "it has been more measured" during the second and third quarters, Mr. Austin wrote.

"The overall net trading activity through September 2020 was 2.85% of starting balances," he added. "In 2019, it was 2.29%. If the trend continues, 2020 will be the year with the highest trading activity since 2008. Trades have almost universally been out of equities and into fixed income funds."

Among the mutual fund managers, most of the biggest got bigger for the period ended June 30, and the rankings of industry leaders barely changed from the year-ago period.

Among the top three, Vanguard Group Inc.'s mutual fund AUM rose 2.9% to $930.6 billion; Fidelity Investments AUM gained 10.6% to $667.3 billion; and Capital Group Cos. Inc. added 4.4% to $430.7 billion.

Fourth-ranked T. Rowe Price Inc.'s AUM slipped 1.2% to $255.2 billion and fifth-ranked J.P. Morgan Asset Management's AUM dropped 3.8% to $101.1 billion.

Beyond the three largest mutual fund providers, a majority of the top 25 firms experienced AUM declines.

Target-date funds drove the gains in the mutual fund industry. For the 12 months ended June 30, target-date mutual funds' AUM rose 7% from the year-ago period, reaching $939 billion. Target-date funds now contribute 28.8% of total mutual-fund AUM; five years ago, it was 20.2%.

Among target-date series, commingled trusts surged to $792.7 billion AUM by June 30, up 17.1% from the year ago period and up 136.5% over five years. Commingled trusts now account for 41.5% of aggregate target-date fund AUM; five years ago, it was 35.2%.

Mutual funds still lead the target date universe with 49.2% of the total AUM, but their market share has declined from five years ago when they owned 52.6% of the AUM.

The AUM of target-date funds using separate accounts rose to $169 billion for the 12 months ended June 30, up 24.5% from the year ago period and up 50% from five years ago.

Custom target-date funds' AUM reached $166 billion for the 12 months ended June 30, up 14% from the year-ago period and up 68.8% from five years ago.

"I expect contributions to target-date funds will continue because they are the most popular QDIA," said Ross Bremen, a partner with NEPC LLC, Boston.

The growth of commingled trusts fits in with sponsors' desire for lower-cost investments as well as with their concerns about being sued for ERISA violations by participants claiming plans' investment fees were too high, he added.

Among Mr. Gardner's clients, the large plan segment — $500 million or more in total plan assets — "are more likely to consider or be eligible for CITs (collective investment trusts) in the target date asset class, primarily as a way to explore lower costs for participants," he said. With more than 620 DC clients, the average plan's asset size is $205 million. Approximately 245 clients have assets of $100 million or more, he said.

"I expect CITs to continue to gain due to lower operations' costs relative to either mutual funds or separate accounts," Ms. Tejera wrote.

The CIT costs and "growing comfort of the plan sponsors" has led to their greater popularity, she added. "I do not think participants have a view one way or the other."

Among the 20 largest target-date providers, 13 posted AUM gains, four experienced declines; one essentially broke even; and results for two were incomplete because they didn't provide information for the year-ago period.

Vanguard continued to dominate with an AUM of $631.6 billion, up 6.6% from the year-ago period. Vanguard's AUM is greater than the combined AUM of firms ranked 5 through 20.

BlackRock Inc. had an AUM of $255 billion, up 12.3% from the year-ago period, which enabled it to move into second place from fourth.

Fidelity Investments stayed in third place with an AUM of $253.6 billion, up 10.4%. T. Rowe Price Group slipped to fourth from second even though its AUM rose 6.9% to $247.6 billion.

Among the various categories, Vanguard retained its dominant first-place positions for mutual fund target-date series and for commingled trust series, while BlackRock maintained its leadership in the separate account and custom categories.

Despite the dominant roles in mutual funds and target-date funds played by a relative handful of asset managers, DC consultants said sponsors shouldn't feel squeezed on price or choice of investments.

"Given the fierce competition among target date managers, fees have continued to come down," said Mr. Bremen.

"I do not have concerns regarding lack of choice or options, as there are still many choices for my clients," wrote Ms. Tejera.

Mr. Gardner said his clients haven't experienced any pricing squeezes among mutual funds or target date funds. "Eighty percent of target date funds isn't pricing," he said. The glidepath, underlying asset classes and asset volatility are crucial issues for clients' choosing a target-date provider, he said. So is the choice of a "to" series, in which the equity component remains the same after the retirement-age vintage fund or a "through" series, in which the equity component continues to decline after the retirement-age vintage fund, he added.

Future growth among participants' retirement assets will depend on the speed and scope of the health care, employment and general economy recoveries from the damage caused by the coronavirus pandemic, consultants said.

One source of potential growth, they said, is the SECURE Act, the provisions and benefits of which essentially have been obscured by the coronavirus and sponsors' efforts to implement the CARES Act.

Mr. Bremen said one immediate benefit of the Setting Every Community Up for Retirement Enhancement Act, passed in December 2019, is the raising to 15% from 10% the safe harbor cap on employees' contributions to retirement accounts.

Another safe harbor may take longer to produce results — the one that protects sponsors from liability if they take certain steps and receive certain assurances from insurers about in-plan annuities and other retirement income products.

"Anything that Washington does to benefit participants is great," said Mr. Bremen, citing the law's safe harbor and product portability provisions. "The reality of the COVID environment is that sponsors are focusing on ensuring participants stay the course" rather than adding new features quickly.

"With everything going on and with market volatility, we haven't seen a lot of activity on retirement income," he said.

Ms. Tejara noted that it's too early to assess the impact of the SECURE Act and that her clients also aren't forging ahead on retirement income. "Plan sponsors have been busy with COVID on investments, withdrawals and loans, which has caused a pause," she added.