Institutional Investors Add Active Allocations to Start 2023

Asset flows data for early this year shows institutional investors bucking 2022 trends. 

Institutional investors expect to increase allocations to active investment strategies, new Cerulli Associates research analyzing mutual fund and exchange-traded product trends in January shows. 

While mutual funds experienced $1.9 billion of overall outflows to start 2023, some asset classes have gathered positive net flows to start the year, data shows.  

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Taxable bond mutual funds added more than $15 billion of inflows during January, and municipal bond mutual funds added $7.7 billion during the month, bucking the 2022 trend in which outflows amounted to $148.7 billion, according to the February 2023 report, The Cerulli Edge—U.S. Monthly Product Trends, Cerulli announced in a press release. 

“The gap between active and passively managed funds hit new lows in December 2022; however, [the] Cerulli survey [shows], most institutional investors still want a majority of their portfolios to be actively managed,” the release stated. “A noteworthy number of institutional investors indicate increasing their allocations to active strategies in equities (28%) and fixed income (20%).” 

Among institutional investors expecting to increase the use of active equity strategies, 32% expect to expand their allocations to U.S. equity, Cerulli found.

Although mutual funds closed 2022 on a “sour note,”—having dropped 4.5% in December—they have so far reversed course in 2023, with assets climbing 5.8% to $17.2 trillion, the release added.

In January, exchange-traded funds climbed 6.6%, ending the month with $6.9 trillion of total assets, data showed.

“Net [ETF] flows during January continue to be steady, coming in at $44.3 billion, slightly below the $52.6 billion monthly average for the preceding five months,” the release stated.

Cerulli Associates’ data for institutional investors’ expected allocations to equity and fixed income were based on a survey that was administrated in the second quarter of 2022, the report noted.

Comprising 17.7% of total ETF assets, taxable bond flows accounted for 28% or $22.6 billion of all ETF flows in January.

“The success can be largely attributed to Treasury bond ETFs,” the release stated.

The full report is available for purchase

IRS Offers New Rules on Deadline for Using Retirement Forfeitures

The proposal states that plan administrators need to use retirement plan forfeitures within 12 months.

The Internal Revenue Service proposed new rules on Monday  formalizing the timing and use of forfeitures in qualified retirement plans by plan sponsors.

The proposal, which would affect participants in, beneficiaries of, administrators of, and sponsors of qualified retirement plans, according to information published in the Federal Register.

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It would more clearly define how retirement plans should handle money forfeited by participants when they leave an employer before the end of a vesting schedule, when they die or when other factors result in funds going back to the plan sponsor. While the rule likely will not change how plan advisers and administrators are currently operating, it would make those processes clearer, says R. Randall Tracht, an attorney with Morgan Lewis specializing in retirement plans and the Employee Retirement Income Security Act.

“The IRS has long been of the view that the Internal Revenue Code’s tax-qualification rules and requirements generally do not permit defined contribution plans to carry over unused and unallocated forfeitures from year to year,” Tracht says. “The IRS regularly expressed this position in the course of retirement plan audits, but, until now, the IRS had not issued formal regulations setting forth their position.”

In its proposal, the IRS said some defined contribution plan administrators place forfeited funds into a “plan suspense account” in which the money is held before being put to use. The proposed regulations would “generally require” that plan administrators use forfeitures no later than 12 months after the close of the plan year in which the forfeitures happened.

The proposal also specifies the uses for defined contribution plan forfeitures, which are to pay reasonable plan administrative expenses, reduce employer contributions or increase benefits for plan participants.

“Plan sponsors will want to review their plan terms and check with the plan’s recordkeeper to consider whether any changes to the plan’s terms or recordkeeping processes may be desirable,” Tracht says.

The proposed rules are effective for plan years beginning on and after January 1, 2024, and include a transition rule that deems pre-2024 forfeitures to have been incurred in the first plan year beginning on or after January 1, 2024, according to Tracht. This will allow plans time to comply with the new rules.

The IRS said that the proposed regulations are “not expected to require changes to plan terms or plan operations, or otherwise have a significant impact on plans or plan sponsors.” It did say, however, that it is seeking comment from smaller plans and plan sponsors to discuss the “impacts these proposed regulations may have.”

 

The agency will take public comments online or by mail until May 30 and will set a date for a public hearing if requested.

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