2014 Investment Trends
March 30, 2015 – CHICAGO–(BUSINESS WIRE)–Defined Contribution (DC) retirement plan participants continued their move toward target date funds in 2014, with nearly 33 percent of cash flows invested in the multi-asset class funds during the year, according to Northern Trust’s third annual DC Tracker.
“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” Among core investment options, U.S. equities were the favorite asset class, attracting 19 percent of net flows based on participant investment elections in the DC Tracker universe of 100 plans, representing $265 billion in assets as of December 31, 2014.
Bias toward US Equities
The plans are a subset of the total DC assets serviced by Northern Trust. “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,” said Susan Czochara, Managing Director, DC Solutions at Northern Trust. “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 percent of asset flows in retirement plans tracked by Northern Trust. As a result of those flows, target date funds make up 22 percent of all assets by market value in the 2015 DC Tracker, up from 15.7 percent the previous year.
U.S. equity remains the largest single investment category in the DC Tracker, with 33.6 percent of all assets by market value. That is down from its 35.5 percent share of assets in 2013. However, cash flows in 2014 favored U.S. equities (19.1 percent) over fixed income (16.7 percent), international equity (12.3 percent) or stable value/money market funds (5.3 percent).
“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,” said Jim Danaher, Managing Director, DC Solutions at Northern Trust. “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.”
'Home Country Bias'
Northern Trust examined this issue in a white paper, Home Country Bias: Why It Can Undermine Retirement Portfolios, released in February 2015. “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,” said David W. Fox Jr., head of Corporate & Institutional Services in the Americas for Northern Trust.
“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 $117 billion in DC assets under management and $275 billion 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.
About Northern Trust
Northern Trust Corporation (Nasdaq: NTRS) is a leading provider of wealth management, asset servicing, asset management and banking to corporations, institutions, affluent families and individuals. Founded in Chicago in 1889, Northern Trust has offices in the United States in 19 states and Washington, D.C., and 20 international locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of December 31, 2014, Northern Trust had assets under custody of US$6 trillion, and assets under management of US$934 billion. For 125 years, Northern Trust has earned distinction as an industry leader for exceptional service, financial expertise, integrity and innovation. Visit 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.