Plan Assets Moving Away from Fixed Income

Defined contribution (DC) plan participants reduced their holdings in fixed income and increased allocations to U.S. small-cap and mid-cap equities in 2013, while target-date funds continued to increase as a top asset class, says a recent analysis.

According to the second annual edition of Northern Trust’s Defined Contribution Tracker, target-date funds (TDFs) drew 14.6% of asset flows into retirement plans as tracked by the firm in 2013, the strongest flows of any investment category. It was the second year of strong flows into TDFs, which made up 15.7% of all assets in the Northern Trust universe of DC plans, the second-largest share of any category.

“Target-date funds have dominated asset flows in our Defined Contribution Tracker, benefiting from their status as the preferred qualified default investment (QDIA) in most DC plans,” says Jim Danaher, managing director of defined contribution solutions at Northern Trust, based in Chicago. “With the increased adoption of automatic enrollment and other automated features, we anticipate that target-date funds will continue to experience strong growth, eventually accounting for the majority of DC assets.”

Northern Trust’s Defined Contribution Tracker analyzes data from a universe of nearly 100 retirement plans in the United States, representing more than 1.7 million participants and $225 billion in assets with daily valuation serviced by Northern Trust.

Along with a trend toward TDFs, the tracker shows that many participants continue to shift between asset classes from year to year. Fixed income saw outflows of nearly 11% in 2013, for example, after the category had inflows of 9.2% in 2012. U.S. mid cap and small cap drew 6.3% and 4.4%, respectively, in new flows in 2013 after losing assets the previous year.

The tracker also noted the following:

  • International equities drew 9.3% net flows in 2013, a second consecutive year of inflows. Yet participant portfolios continue to exhibit a home country bias, with an 82% to 18% split between U.S. and non-U.S. equities compared with the approximately 50% to 50% breakdown within major world equity indexes.
  • Within the U.S., participants demonstrate a bias toward small- and mid-cap equities with strong flows to those asset classes and minimal (0.8%) inflows into large-cap stocks. U.S. large-cap equities still represent the largest asset class held by participants, with 24.4% of assets, but participant portfolios are actually underweight for large caps relative to the market capitalization weights of U.S. equities.
  • With significant outflows in 2012 and 2013, company stock decreased at the fastest rate of all categories, as plan sponsors look at ways to effectively reduce the concentrated positions in individual securities that exist in participant accounts.
  • A closer look at target date funds reveals that plan sponsors are favoring solutions that utilize passive or index funds, with 58% implementing all passive and another 25% using a blend of active and passive funds.

“The Defined Contribution Tracker provides a glimpse into how participants are investing and can yield insights into investor behavior when matched up with market events,” says David W. Fox Jr., head of corporate and institutional services in the Americas for Northern Trust. “More importantly, this tool demonstrates how plan sponsor actions, such as adding pre-mixed options like target-date funds and focusing on company stock, can help participants construct more diversified portfolios as they invest for retirement.”

Northern Trust Corporation is a provider of investment management, asset and fund administration, banking solutions and fiduciary services for corporations, institutions and affluent individuals worldwide. More information can be found here.