TDFs and U.S. Equities Attract Flows in DC Plans

DC plan participants who choose their own investments prefer equities, Northern Trust finds.

Target-date funds (TDFs) were the dominant source for inflows into defined contribution (DC) retirement plans in 2014, with nearly 33% of cash flows invested in the multi-asset class funds, according to Northern Trust’s DC Tracker.

“The trend toward target-date funds has accelerated in recent years, as more DC plans use these funds as the default investment option,” says Susan Czochara, managing director, DC Solutions at Northern Trust. “However, high allocations to U.S. equity indicate that many participants still lack global diversification in their DC investment portfolios.”

U.S. equities remained the top allocation in 401(k) plans. Equities attracted 19% of net flows, based on participant investment elections in the DC Tracker pool of 100 plans, which are a subset of the total DC assets serviced by Northern Trust. This represents $265 billion in assets as of December 31, 2014.

The DC Tracker reveals two trends among retirement plan investors, explains Czochara. First, there is an increased reliance on TDFs to determine the investment mix. Second, a continued bias toward U.S. equities persists among those who select their own allocation.

Drawing 32.7% of asset flows in retirement plans in 2014, TDFs currently make up 22% of all assets by market value in the 2015 DC Tracker. This is up from 15.7% the previous year.

With 33.6% of all assets by market value, U.S. equity remains the largest single investment category in the DC tracker. This number is down from the 35.5% share of assets in 2013. However, statistics show cash flows in 2014 at 19.1%, favoring U.S. equities over fixed income (16.7%), international equity (12.3%), or stable value/money market funds (5.3%).

“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,” says Jim Danaher, managing director, DC Solutions at Northern Trust. “The risks of home-country bias include over-concentration 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.”

The DC Tracker report is here.