In The News

While defined contribution retirement plan sponsors have increasingly showed interest in offering more personalized retirement investments to their participants, widespread access to managed accounts has yet to be achieved.

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“However, a recent NEPC paper found that high fees tend to erode the value of managed accounts, as a fee of 30 basis points typically requires a participant to increase their equity exposure by 20% to 30%, or by two to three TDF vintages, to achieve a similar net-of-fee return. In addition, for participants paying a lower fee of 15 basis points, for example, NEPC argued that they could anticipate returns comparable to a typical TDF investor. Even with the advice component of managed accounts, NEPC found that the added value of that feature declined over time.”

U.S. retirement plans in Pensions & Investments’ latest annual survey reported their strongest gains in three years, even as the portfolio payoff from diversification hit an air pocket and persistent equity market dominance by a handful of U.S. tech giants continued to dog investment teams.

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Aaron Chastain, an Atlanta-based principal and corporate solutions leader with NEPC, said the steady appeal of private credit likely reflects its relatively attractive balance of risk and returns. “A lot of particularly large plan sponsors … still have return needs for their growth portfolio but are wanting to incrementally derisk as they get better funded. I think we’re seeing a little bit more focus on private credit as that middle ground,” offering high returns with both superior safety and shorter duration than something like private equity, he said.

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NEPC’s Chastain said that urge to diversify away from an overconcentrated S&P 500 index has led clients to seek out more active strategies with less reliance on the Mag Seven, including global equity strategies offering broader opportunities to seek alpha.

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Chastain said with credit spreads over Treasuries narrowing last year, some investors have concluded that they’re no longer getting paid to hold credit. Switching into passive Treasuries leaves them positioned more cautiously to lean into credit again in the event of market dislocations.

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The UC San Diego Foundation, which runs $1.6bn, topped the performance charts with a 15.5% gain in the year to mid-2024 as smaller endowments outperformed their bigger peers.

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“Since late 2022, public large-cap equities in the US have been the performance leaders, spurred by exceptional gains for large technology corporations at the forefront of the AI revolution,” said NEPC, which compiled the annual ranking.

“This trend has been of great value to smaller and mid-sized endowments with higher US large-cap exposure.”

The top-performing university and college endowments in fiscal year 2024 had high exposures to public companies assisting in the artificial intelligence revolution, according to an NEPC report released Jan. 14.

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For a second consecutive year, the largest endowments mostly trailed behind their smaller and mid-sized peers — particularly those with more exposure to public equities, wrote Colin Hatton, principal and senior consultant at NEPC’s endowments and foundation practice.

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And while “it’s often true that compelling new technologies arise in the private markets first, which is a reason why the mega endowments have historically outperformed,” longstanding, U.S.-domiciled public companies such as Nvidia, Amazon and Microsoft have been responsible for 24.6% of the S&P 500’s gains, Hatton added.

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Although AI drove strong returns for large-cap U.S. stocks, Hatton noted “we’re not convinced this is a trend with staying power.” He added it may be hard for technology firms to outperform earnings expectations to support high valuation multiples, which have contributed to their gains so far.

In fiscal 2024, university endowments followed a similar trend as the prior year: Endowments with a higher allocation to equites were top performers, while endowments with higher allocations to private markets often saw single-digit returns.

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The median endowment, out of 78 endowments NEPC tracked, returned 11.9% in the fiscal year.

“The [UC San Diego Foundation’s] success stems from a unique approach to endowment management that is a particularly good fit for current market trends,” Colin Hatton, an NEPC principal for endowments and foundations, wrote in the NEPC report. “They utilize several University of California General Endowment Pool accounts, enhancing them with their own strategic position which consists primarily of U.S. large-cap equity. It’s a hybrid approach that allows them to benefit from the University of California Investment Office’s resources while employing an asset allocation that meets their own needs.”

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“We also believe that private equity and venture capital aren’t likely to remain underperforming sectors for an extended period of time,” the NEPC report noted. “Both segments needed to endure a period of repricing in an environment of higher interest rates, but we think that cycle will come to an end now that interest rates are expected to remain stable or come down.”

Pensions in New York, California, Ohio, Connecticut and New Hampshire are upping their focus on real assets, spurred by improved real estate fundamentals and AI infrastructure.

As 2025 portends to be filled with political, legislative and regulatory uncertainty, defined contribution plan executives are focusing on what they can do and should do — rather than what might happen.

“Uncertainty creates inaction,” said Mikaylee O’Connor, head of defined contribution solutions at NEPC.