Passive vs. Active in DC Plans

Passive exposure in defined contribution plans is not just a function of fund selection. It varies by asset class: passive dominates core equity exposures, while active remains more prevalent in fixed income and other less indexed segments. It is also increasing within target-date funds as allocations to them grow.

The magnitude of the shift varies significantly. In US small blend equity, for example, active strategies fell from 65% of funds in 2013 to just 21% in 2023. Similar, though less pronounced, patterns appear across other core equity categories. By contrast, fixed income segments such as high yield and core plus bonds remain more actively managed.

The shift toward passive is also visible across plan sizes. A decade ago, smaller plans were far more likely to rely on active strategies. Today, that gap has largely closed, with smaller plans adopting index strategies at rates like their larger counterparts.

These findings draw from a series of analyses for the DCIIA Retirement Research Center examining how DC core menus have evolved over the last decade, leveraging plan investment data from filing years 2013 to 2023.

In the first piece, which we summarized for Enterprising Investor, we explored changes in core menus. In our second piece, summarized here, we explore changes in the availability and utilization of passive investment strategies.

1. Indexing is up: For all the asset styles (i.e., Morningstar categories) considered for the analysis, index strategies have become more common over the last decade, although at varying rates of change over the period. The asset class with the greatest shift into passive is US small blend equity, where 65% of funds were active in 2013 versus 21% in 2023, reducing approximately 5% per year. Intermediate-term core bond, US large blend equity, US mid blend equity, and international large equity also saw significant shifts into passive. In contrast, while asset classes like core plus bonds, high yield, international growth equity, and international value equity experienced a shift to passive, the pivot was significantly more muted.
2. Very active vs very passive: Index fund availability varies significantly by investment styles. For example, within the fixed income asset class, intermediate core bond plus, high yield, and inflation-protected bonds are very active, as well as within growth and value across US domestic equity market capitalization groups and foreign equity. In contrast, blend equity styles are increasingly (and overwhelmingly) passive.
3. Smaller plans have caught up with larger plans with indexing: While smaller 401(k) plans were less likely to use index strategies in the earlier part of the analysis, the differences have mostly disappeared. For example, 49% of plans with $1 million to $5 million in total assets used an active large blend fund using 2013 plan filing data versus 17% of plans with over $500 million in assets. In contrast, by 2023, usage was 18% and 10%, respectively.
4. Among TDFs, passive is chipping away at active: For the TDF analysis, we group the series as being active, blend, or passive.Morningstar considers all TDF series actively managed since portfolio managers make asset allocation and glidepath decisions. A series is considered passive if more than 75% of its assets are in index funds, whereas those with less than 25% of assets in index funds are deemed active. Those with between 25% and 75% of assets in index funds are considered blend offerings. We find that the total percentage of 401(k) plans in this analysis using active TDFs has declined from approximately 80% in 2013 to less than 50% in 2023. Blend TDFs had approximately 2% of TDF assets in 2023, up from approximately 0.5% in 2013. Worth noting, though, is that the share of mega 401(k) plans using active strategies has remained remarkably flat over the period.
5. When plan assets in TDFs go up, the odds of using an active TDF strategy go down: Finally, we explored how the likelihood of using a passive TDF varied by plan size, leveraging the 2023 plan filing data. We did this to understand how rising assets in TDFs could affect plan sponsor decisions around strategy type (beyond the more general trend in passive strategies) and placed 401(k) plans into four groups based on the percentage of total plan assets in TDFs.We find thatas plan assets in TDFs increase, the plan is more likely to leverage a passive strategy. While this effect holds for micro, small, and mid-sized plans, it is not clear why this is reversed for large and mega plans.

Passive adoption in DC plans is broad but uneven. It is most pronounced in core equity exposures, more limited in fixed income, has largely converged across plan sizes, and continues to increase within TDFs.