Indexing in DC Plans Rises Sharply

August 29, 2013 ( – Research from Vanguard's Center for Retirement Research examines how the adoption of index target-date strategies has transformed the composition of defined contribution (DC) plans.

By PLANSPONSOR staff | August 29, 2013
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Strongly associated with indexing as a core investment philosophy, Vanguard looks at the evolution of indexing within Vanguard-administered DC plans in “Indexing in Defined Contribution Plans 2004-2012.” Although the research is specific to Vanguard, the paper states the firm’s belief that an analysis of the Vanguard experience is a useful benchmark for assessing the relationship of target-date funds (TDFs) and indexing in DC plans over time.

By the end of the eight-year period, nearly half of Vanguard DC plan assets were invested in index funds, and $1 of every $6 was invested in index target-date options. As recently as 2008, the fraction of actively managed assets exceeded the fraction of indexed assets within Vanguard DC plans. By year-end 2012, 45% of Vanguard DC plan assets were invested in indexed or passively managed options, 31% were invested in actively managed options, and the remaining 24% were invested in “non-indexable” assets—money  market, stable value and company stock options.

Several trends are reshaping the composition of DC plan assets, according to Vanguard’s paper. As noted in earlier Vanguard research, the growth of TDFs is transforming participant investment allocations, whether through default or voluntary choice mechanisms (see “More Participants Seeking Managed Investments”).

At the same time, sponsor scrutiny of recordkeeping and investment fees in DC plans has spiked. Sponsors have been considering how to use passive investment strategies to reduce investment costs, as well as reduce active management risk exposure and improve diversification.

Menu composition has changed during the eight years Vanguard examined. The average number of options offered increased, from 18 to 27, because of the addition of index target-date options to plan menus. Plan sponsors adding index target-date options to plan menus replaced actively managed funds. With the introduction of index TDFs within Vanguard-administered DC plans, the fraction of indexed assets has increased sharply.