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.