Providers of mutual funds and target-date funds for defined contribution plans suffered a severe market-induced setback for the 12 months ended June 30, as assets under management for these categories fell sharply vs. record numbers achieved during the year-ago period.
For 12 months ended June 30, the annual survey by Pensions & Investments found that proprietary mutual fund AUM sank 19.8% to $3.35 trillion. Proprietary target-date AUM fell 9.7% to $2.35 trillion.
Among target-date funds, those using mutual funds had a 15.5% loss in AUM to $1.06 trillion.
For collective investment trust-based target-date funds, the AUM fell 8.2% to $1.09 trillion, marking the first time CIT-based target-date funds outpaced mutual fund-based target-date funds.
Custom target-date fund AUM rose 11.6% to $236.9 billion. The separate account category gained 31.6% to $190.8 billion.
The drop in assets was fueled by the one-two punch of sinking stocks and rising interest rates, which in turn led to plunging fixed-income assets.
For the 12 months ended June 30, the S&P 500 total return was down 10.6% and the Bloomberg U.S. Aggregate Bond index fell 10.3%.
The three month period ended Sept. 30 was dreadful, too, as the S&P dropped 4.9% and the Bloomberg Aggregate index fell a further 4.8%.
Given this environment, most of the largest equity mutual funds used by DC plans and most of the largest fixed-income mutual funds lost assets during the year ended June 30.
"There was nowhere to hide" was a common refrain from interviewees describing the impact on participants, sponsors and asset managers.
Despite the carnage, DC consultants and researchers said asset managers, sponsors and participants haven't made dramatic changes in strategy or investing.
"We haven't seen meaningful differences from a participant standpoint," said Mark Andersen, the San Francisco-based senior vice president and manager of the trust advisory group for Callan LLC.
"At the margins," some participants are moving some assets to money market funds or stable value funds, but the shift is "by no means drastic," he said.
"Participant behavior from a savings perspective has remained robust," said Mr. Andersen, adding that Callan didn't see any dramatic changes in savings rates during the first half of 2022.
Among target-date providers, Mr. Andersen said Callan hasn't detected strategic changes in their glidepaths or allocations, although some are able to make tactical changes — adjusting components of their overall strategies.
Consultant David O'Meara said tactical changes within a target-date series reflected a "tilt" toward a more conservative portfolio. Examples of a tactical adjustment could be moving some assets to developed market equity from emerging markets equity, or high-yield bonds to investment-grade bonds, or small-cap equity to large cap, said Mr. O'Meara, New York-based director of investments for Willis Towers Watson PLC. "Generally speaking, these are small tilts to the portfolio," he said.
As for sponsors, Mr. O'Meara said he was "pleasantly surprised at how patient and calm they have reacted." Of course, clients are asking questions but "they are acting prudently — not reactionary."
Mr. O'Meara doesn't expect sponsors to make "meaningful changes" to their investment lineups. He noted some investment switching by participants to money market or stable value funds "at the margins," adding that changes were "not at a rate that would cause alarm."
Stable value funds (82%) and money market funds (13% ) represented the biggest sources of trading inflows during the first half of 2022, according to asset allocations measured by the Alight Solutions 401(k) Index, which covers more than 2 million participants with over $200 billion in Alight record-keeping accounts.
Also, for the first six months of 2022, the Alight Solutions 401(k) Index found that total transfers as a percentage of participants' starting balances was 0.86%. Last year, it was 0.5%. In 2020, which included the COVID-19-induced market plunge, it was 3.5%.
"When the market goes down, people tend to trade more," said Robert Austin, the Charlotte, N.C.-based research director for Alight. Sponsors, he added, haven't made big changes. "They have stayed the course," he said.
The biggest sources of trading outflows for the first half of 2022 were target-date funds (52%), large cap U.S. equity funds (25%) and company stock (7%).
However, outflows only tell part of the retirement investing story. The biggest source of contributions during this period was target-date funds (46%), followed by large-cap U.S. equity (21%).
The Alight index illustrates why target-date funds might offer some slivers of a silver lining even though their AUM fell during the 12 months ended June 30 in the P&I survey, thanks to automatic enrollment, qualified default investment alternatives and auto escalation.
As target-date funds play a bigger role in investment lineups and the dominant role in QDIAs, that means money is still flowing into accounts even as market depreciation is shrinking them.
For example, P&I's tracking of mutual fund asset allocations over the last two 12-month periods shows the U.S. equity allocation dropped to 39.1% from 42.1% and the global equity/non-U.S. equity allocation fell to 9.8% from 11%.
Fixed-income was flat at 8.6% as was the balanced/asset allocation at 6.2%. Money market mutual funds AUM rose to 4% from 3.1%
However, the allocation to target-date mutual funds climbed to 30.3% from 27.4%.
That's no surprise to DC experts who pointed out that the biggest source of new money into retirements accounts is via target-date funds as QDIAs. For Callan clients, target-funds represent approximately two-thirds of new contributions, Mr. Andersen said.
For clients at Fiducient Advisors, the "vast majority" of new contributions go to target-date funds, said Matthew Kaminski, the Windsor, Conn.-based partner and research director for global markets who attributes this to plan design — auto enrollment and QDIA — and "behavioral inertia" of participants.
Based on his conversations with record keepers, Mr. Kaminski said target-date investors trade less often than do-it-yourself investors in DC plans.
The overwhelming majority of the decline in clients' retirement accounts was market-related rather than by participants cutting back contributions or taking distributions, he added.
"Target-date funds will continue to be built mostly on equity and fixed income," he said. "There's not much participants can do."
Mr. Kaminski added that he didn't see any significant changes in strategy by target-date fund providers.
Among NEPC defined contribution clients, 67% of new money is invested in target-date funds, said William Ryan, Chicago-based partner and head of defined contribution plan solutions at the investment consultant. Target-date funds now account for 46% of clients' retirement assets, up 2 percentage points from last year.
Like other consultants, Mr. Ryan said there has been some switches by clients — "nothing oversized" — to stable value and/or money market funds.
Among NEPC clients, 76% offered a stable value fund and 43% offered a money market fund by the end 2021. At the end of 2020, he said, 66% of clients offered a stable value fund and 53% offered a money market fund.
Mr. Ryan said asset managers and target-date providers aren't making big changes to strategies, although some of the latter are making incremental changes to make the portfolios more conservative.
Plan sponsors aren't reacting, although the recent market activity should "reinforce and remind" investment committees to evaluate their target-date fund selections to see if they remain appropriate for participants, he said.
The P&I research also showed that for target-date funds, the biggest declines between the 12 months ended June 30 and the year-ago period occurred among the most conservative vintages — the funds with the most fixed income allocations — as well as other vintages with the most assets.
Starting with the pre-2025 funds and proceeding every five years, the AUM in funds from the latest survey were less than the AUM in corresponding funds for the previous survey, except for the 2060 and 2065 funds, which have the biggest allocation to equities.
Consultants and researchers say there's a logical explanation. All vintages were hit by falling equity and bond markets, but the vintages with the most conservative allocations — used by participants closer to retirement — didn't get the traditional benefit of fixed-income softening the blow of equity declines and volatility.
Also, these conservative allocation vintages, such as a 2025 fund, have more assets because their participants have been saving longer than younger participants in the more equity-heavy vintages, such as a 2060 fund. Even though both types of vintages benefit from auto-enrollment via QDIAs, the infusion of contributions had less impact — on a percentage basis — on the larger-asset funds than on the smaller-asset funds.
And that also means that market declines had a bigger impact on overall assets of the larger AUM funds than on the smaller AUM funds.
One positive note did emerge from the results.
Although AUM as of June 30 fell below record levels for the year-ago period, the latest results for the broad categories of proprietary mutual funds and proprietary target-date strategies were still better — in fact, the second highest ever — than their respective results for other 12-month periods tracked by P&I.
