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.