Defined Contribution (DC) retirement plan participants continued their move toward target date funds in 2014, with nearly 33% of cash flows invested in the multi-asset class funds during the year, according to Northern Trust’s third annual DC Tracker.
Among core investment options, US equities were the favourite asset class, attracting 19% of net flows based on participant investment elections in the DC Tracker universe of 100 plans, representing $265bn in assets as of December 31, 2014.
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The plans are a subset of the total DC assets serviced by Northern Trust.
Northern Trust managing director, DC solutions Susan Czochara said, "Our DC Tracker shows two primary themes among retirement plan investors: an increased reliance on target date funds to determine the investment mix, and a continued bias toward U.S. equities among those who select their own allocation. The trend toward target date funds has accelerated in recent years, as more DC plans use these funds as the default investment option. However, high allocations to U.S. equity indicate that many participants still lack global diversification in their DC investment portfolios."
In 2014, target date funds – asset allocation vehicles that automatically rebalance and invest more conservatively as a participant nears retirement age – drew 32.7% of asset flows in retirement plans tracked by Northern Trust.
As a result of those flows, target date funds make up 22% of all assets by market value in the 2015 DC Tracker, up from 15.7% the previous year.
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By GlobalDataUS equity remains the largest single investment category in the DC Tracker, with 33.6% of all assets by market value. That is down from its 35.5% share of assets in 2013.
However, cash flows in 2014 favoured US equities (19.1%) over fixed income (16.7%), international equity (12.3%) or stable value/money market funds (5.3%).
Northern Trust managing director, DC solutions Jim Danaher remarked, "The dominance of U.S. equities in DC portfolios is the result of two related factors – a tendency among U.S. participants to invest in what they know, and DC plans that offer more U.S. equity funds than international funds. The risks of home-country bias include overconcentration in a single market and missed exposure to a wider set of opportunities. By offering a more balanced menu of U.S. and international equity options, along with target date funds, plan sponsors can help participants invest across the global equity opportunity set, which will position their portfolios for greater potential long-term gains."
Northern Trust head of corporate & institutional services in the Americas David W. Fox Jr. added, "Data from the DC Tracker can be helpful to plan sponsors in identifying issues and best practices as defined contribution plans continue to evolve as the primary retirement savings and investment vehicle for U.S. workers. For example, the 2014 tracker shows a trend toward streamlining investment options and an increase in custom target date solutions offered by larger plans, which often lead the way in DC plan design."
Northern Trust has $117bn in DC assets under management and $275bn in assets under custody for DC plans, as of December 31, 2014.
Its global custody unit works closely with the asset management team to provide comprehensive integrated solutions for DC plans, including daily valuation, multi-manager unitization, Defined Benefit-Defined Contribution integration, performance measurement and cross-border pooling.
