August 28, 2013

Vanguard: Index TDFs Gobbling Up DC Plan Assets

Since 2004, indexed and passively managed investments have been the majority, thanks largely to target-date funds

Vanguard sign (Photo: AP) Vanguard sign (Photo: AP)

In an analysis of assets held in Vanguard defined contribution plans, the company found that by the end of 2012, nearly half of plan assets were in indexed or passively managed investments, according to a report released in August. The fund giant credited the trend to the proliferation of index target-date funds.

Thirty-one percent of assets were in actively managed funds, and 24% in “nonindexable” investments like money-market and stable value funds, and company stock. By comparison, in 2004, soon after Vanguard launched passively managed target-date funds, 40% of DC assets were in active funds, with 28% in index funds and 32% in nonindexable options.

Vanguard studied assets held in its plans between 2004 and 2012. The company introduced passive target-date funds at the end of 2003, and acknowledged that the early introduction has led to a higher level of adoption among clients compared with industry averages.

When nonindexable assets were excluded from the analysis, 2% of plans were invested entirely in passive options, and 5% had at least 90% of their assets in passive investments. Total assets in index investments increases from 45% to 59% when nonindexable assets are excluded.

Vanguard noted that the increase coincides with the introduction of indexed target-date funds to defined contribution plans, not just because investors want them, but because sponsors are looking at them to lower plan costs.

While indexing’s popularity is reflected in its greater share of plan assets, investment menus are also changing. Vanguard found the percentage of index offerings in plan menus has increased to 57% from 42% in 2004. Most of that growth was from the addition of index target-date funds, which increased from 3% in 2004 to 31% in 2012.

However, Vanguard found that while active offerings account for a smaller percentage of investment lineups, the average number of active offerings actually increased: from 6.4 active stock funds in 2004 to 7.1 in 2012, and from 1.4 active bond funds to 1.7.

“These changes, combined with the overall increase in investment options offered, seem to suggest that plan sponsors are adding index TDFs but not removing other funds from the menu,” according to the report. When looking only at plans that offer index TDFs, though, Vanguard found the average number of funds actually fell.

In plans that offer index TDFs, the average number of funds in the plan fell from 31.7 to its lowest level of 25.4 in 2006, before rising to 28.6 in 2012. In plans that don’t offer index TDFs, the average number of funds has hovered between 15.6 and 16.3 over the same time period. Vanguard pointed out that in the plans with index TDFs, the number of active funds fell by 5.6 funds, while the number of index TDFs offered rose by 6 funds. “This nearly equal exchange in fund types suggests that plan sponsors adding index TDFs are making a broader strategic shift in their view of active versus passive choices in the plan,” according to the report.

Index TDFs account for 17% of plan assets. Vanguard attributed this lower level of assets, relative to other index options, to the funds’ popularity among new investors and their frequent use as the default option in plans with automatic enrollment.

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Check out Vanguard: ETF Acceptance Grows on ThinkAdvisor.

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