Target Date Funds Draw Assets in Retirement Plans

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 their steady climb as a top asset class, according to the second annual edition of Northern Trust’s Defined Contribution Tracker.

Target date funds – asset allocation vehicles that automatically rebalance and invest more conservatively as a participant nears retirement age – drew 14.6 percent of asset flows in retirement plans tracked by Northern Trust in 2013, the strongest flows of any investment category. It was the second year of strong flows into target date funds, which comprised 15.7 percent 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 in most DC plans,” said Jim Danaher, managing director of Defined Contribution Solutions at Northern Trust. “With the increased adoption of auto-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.”

Launched in 2013 to serve as a gauge of participant investment activity, 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 target date funds, the Defined Contribution Tracker shows that many participants continue to shift between asset classes from year to year. Fixed income saw outflows of nearly 11 percent in 2013, for example, after the category had inflows of 9.2 percent in 2012. U.S. mid cap and small cap drew 6.3 percent and 4.4 percent in new flows in 2013 after losing assets the previous year.

Other notable developments from the DC Tracker:

• International equities drew 9.3 percent net flows in 2013, a second consecutive year of inflows. Yet participant portfolios continue to exhibit a home country bias, with an 82 percent/18 percent split between U.S. and non-U.S. equities compared to the approximately 50 percent/50 percent 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 percent) inflows into large-cap stocks. U.S. large cap equities still represent the largest asset class held by participants, with 24.4 percent of assets, but participant portfolios are actually underweight 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 percent implementing all passive and another 25 percent 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,” said David W. Fox Jr., head of Corporate & 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 has $225 billion in DC assets under custody. 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.

About Northern Trust

Northern Trust Corporation (Nasdaq: NTRS) is a leading provider of investment management, asset and fund administration, banking solutions and fiduciary services for corporations, institutions and affluent individuals worldwide. Northern Trust, a financial holding company based in Chicago, has offices in 18 states, Washington, D.C., and 18 international locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of December 31, 2013, Northern Trust had assets under custody of US$5.6 trillion, and assets under investment management of US$884.5 billion. For more than 120 years, Northern Trust has earned distinction as an industry leader in combining exceptional service and expertise with innovative products and technology. For more information, visit www.northerntrust.com or follow us on Twitter @NorthernTrust.

Northern Trust Corporation, Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A., incorporated with limited liability in the U.S. Global legal and regulatory information can be found at http://www.northerntrust.com/disclosures.