The Markets March 7, 2012

Lifecycle Assets See Growth in 2011

The lifecycle investment product market increased to $842 billion as of year-end 2011, reports Strategic Insight (SI), an Asset International company. 
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This represents an 8% increase since the close of the third quarter and a 5% increase from the end of 2010. Lifecycle products (including both mutual fund and variable product) drew net inflows of $11.6 billion in the fourth quarter of 2011.

Mutual funds made up approximately two-thirds (or 68%) of overall lifecycle assets, and garnered $7.2 billion during the fourth quarter. Target-date mutual funds returned 6.85% on a weighted average basis over the quarter, and netted $9.1 billion in flows. Although target-risk mutual funds returned 6.23%, they experienced the second consecutive quarter of net outflows, with $1.9 billion of net outflows.

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Target-date mutual fund assets remained concentrated among the largest managers. As of 2011, the five largest target-date mutual fund providers represented 84% of the market. Managers leading quarterly net intake for target-date mutual funds included Vanguard, Fidelity, T. Rowe Price, TIAA-CREF and J.P. Morgan Funds. In total, these five firms drew in $8.0 billion of net new assets.

The target-risk mutual fund competitive landscape is notably less concentrated than its target-date counterpart, with the largest five managers representing 44% of the $205 billion market. Top quarterly flow leaders included Fidelity, MFS, Manning & Napier, Franklin Templeton and DFA.

“Target-date funds continued to grow faster than target-risk funds in the fourth quarter. Target-risk funds saw net outflows in the last two quarters of 2011, ending the year with modest net outflows,” said Bridget Bearden, head of lifecycle research at Strategic Insight and author of the Lifecycle Fund Quarterly Update report for Strategic Insight’s FRC Division.

Variable annuity products represented $266 billion of lifecycle assets, with nearly all (96%) of the assets residing in target-risk strategies. The $255 billion variable target risk market attracted $4.0 billion of net flows, while posting net returns of 5.68% during the quarter. Variable target-date assets grew 9.6% over the quarter to $11 billion.

Despite fewer than 10 firms active in the variable target-date space, assets have grown by 31% on a year-over-year basis, driven by $1.4 billion of quarterly net new flows into the Prudential target-date series. The largest five variable target-date managers include ING, Prudential, Great West, Fidelity and Lincoln.

Approximately two-thirds of variable target-risk assets reside among the five largest players: Columbia, AXA Equitable, Prudential, John Hancock and MetLife. These five firms combined netted $2.4 billion during the fourth quarter. 

Compliance March 7, 2012

Settlement Entered in Kraft Excessive Fees Case

Kraft Foods Global agreed to pay $9.5 million to settle a lawsuit over excessive fees for its 401(k) plan investments.
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In the long-running case of George v. Kraft Foods Global, Inc., et al., the plaintiffs allege that Kraft violated its Employee Retirement Income Security Act (ERISA) fiduciary duties by allowing excessive fees, holding excessive cash within the plan’s company stock funds and offering imprudent funds as investment options.  

Last July, U.S. District Judge Ruben Castillo, of the U.S. District Court for the Northern District of Illinois, concluded that a jury could find that “a reasonably prudent business person with the interests of all the beneficiaries at heart” would have banned actively managed funds from their 401(k) plan as they had done in the Kraft defined benefit plan because they had concluded that active funds did not consistently outperform index managers (see “Kraft Revisited: Treat DC and DB Investment Selection the Same“).  

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A district court previously ruled Kraft had met the ERISA requirements for fiduciary behavior in monitoring its recordkeeping service agreement with Hewitt regarding the Kraft Foods Global Inc. Thrift Plan, and investigating and then deciding to unitize its company stock funds. However, the 7th U.S. Circuit Court of Appeals sent that claim back to the district court, saying there was a genuine issue of material fact as to whether Kraft acted prudently.  

“After more than five years of litigation, to avoid the additional uncertainties and costs associated with continued litigation, the parties have reached a mutual resolution to this case,” the settlement agreement stated. 

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