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Active U.S. fixed income still dominates the asset class, but passive strategies are steadily gaining ground in defined contribution plans as sponsors add more index options, consultants say.

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The growth of passive fixed income has been centered on investment options offered in defined contribution plans and is about choice rather than replacement, said Mikaylee O’Connor, partner and DC team leader at investment consultant NEPC, in an interview.

“The percentage of plans offering both active and passive fixed income has increased meaningfully, “ O’Connor said. Five years ago, 59% of the consultant’s DC plan clients offered both active and passive options and now 84% of those clients offer both, O’Connor said.

“Most of that was the addition of passive fixed income,” she said. “So, what that means is sponsors are building mirrored investment menus, so that participants can then choose between active and passive.”

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NEPC’s O’Connor also said another structural force supporting more assets moving into passive fixed income over the past five years is fairly tight performance dispersion.

“If you look at over the last five years, the return spread between the top and the bottom quartile managers within core fixed income has been relatively narrow, so it’s making right essentially harder for active managers to differentiate themselves after fees,” O’Connor said.

This makes passive fixed income an “effective building block,” providing very low fees and similar performance.

“I would say that the difference between core and core plus is wider, but not meaningfully, compared to what you see in the U.S. equity or international equity space,” she said.

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