Callan DC Index™
Underlying fund performance, asset allocation, and cash flows of more than 100 large defined contribution plans representing approximately $400 billion in assets are tracked in the Callan DC Index.
Performance
Index Dips after Third Straight Quarterly Gain
The Callan DC Index™ lost 2.9% in 3Q23, which brought the Index’s trailing one-year gain to 13.8%. The Age 45 Target Date Fund (analogous to the 2045 vintage) had a lower quarterly return (-3.6%). Over longer time horizons, the Age 45 TDF’s higher relative equity allocation has contributed to a higher annualized since-inception* return (6.5% vs. 6.1%).
Growth sources
Investment Losses Lead to Fall in Balances
Balances within the DC Index fell by 3.2% after a 4.3% increase in the previous quarter. Investment losses (-2.9%) were the primary driver, while net flows (-0.3%) had a smaller effect. This figure will continue to provide a critical measure of how effectively plans retain the balances of retiring participants, who often own an outsized share of total plan assets.
Turnover
Turnover (i.e., net transfer activity levels within DC plans) in the DC Index decreased to 0.26% from the previous quarter’s measure of 0.33%. Despite the decrease, the Index’s historical average (0.55%) remained steady.
Net cash flow analysis
Automatic features and their appeal to “do-it-for-me” investors typically result in target date funds (TDFs) receiving the largest net inflows in the DC Index, which was the case in 3Q23 as the asset allocation funds garnered 87.2% of quarterly net flows. Within equities, investors withdrew assets from U.S. large cap equity (-8.1%), U.S. small/mid-cap equity (-13.3%), and company stock (-11.3%).
Notably, stable value (-56.2%) saw relatively large outflows for the fourth consecutive quarter. These results should not come as much of a surprise given the recent interest rate environment and each asset class’s sensitivity to changing rates (i.e., the longer underlying duration of a typical stable value portfolio often leads to underperformance relative to money market funds in a sharply rising rate environment).
Equity allocation
Equity Exposure Declines
The Index’s overall allocation to equity (71.5%) fell slightly from the previous quarter’s level (71.8%). The current equity allocation continues to sit above the Index’s historical average (68.4%).
Asset allocation
Fixed Income, TDFs See Gains
U.S. fixed income (5.5%) and target date funds (34.1%) were among the asset classes with the largest percentage increases in allocation, while U.S small/mid cap equity (7.4%) had the largest decrease in allocation from the previous quarter due to net outflows. The increased allocation to U.S. fixed income (0.13 percentage points from the previous quarter) came despite investor outflows, signaling the asset class was a relative outperformer. Within capital preservation, money market funds (1.5%) had a decrease in allocation from the previous quarter’s level (1.4%), while stable value allocations remained relatively stable.
Prevalence of asset class
Money Market Up, Stable Value Down
In the prevalence of funds table, the green bars indicate the prevalence of asset classes within DC plans, while the blue bars show the average allocation to particular asset classes when offered as an option.
The prevalence of money market funds (54.1%) rose by 1.5% accompanied by a decrease in the prevalence of stable value funds (70.1%) by 0.8%. Other notable movements included a 2.3% decrease in the prevalence of a balanced fund offering (39.1%).