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Second Quarter 2014

The Callan DC Index™ is an equally weighted index tracking the cash flows and performance of nearly 90 plans, representing more than one million DC participants and over $140 billion in assets. The Index is updated eight to 10 weeks after the end of the quarter and reflects 401(k) plans as well as other types of DC plans.

Strong Quarter for DC Plans; Stronger Still for Target Date Funds

For the second quarter of 2014, the Callan DC Index™ gained 3.42%, reflecting impressive gains during the period by U.S. equity, and the fact that this asset class remains the top holding in the average DC participant’s portfolio.

Still, DC plans were bested by both the typical corporate DB plan and the typical 2035 target date fund (TDF), which returned 3.55% and 4.02% respectively for the quarter. The DC Index is compared to the average 2035 target date fund, as that is the target date fund that aligns with the time to retirement of the typical DC participant. DB plans’ exposure to longer-term fixed income (versus DC participants’ stable value focus), provided a bit of an advantage, as extended-maturity outperformed shorter-term bonds during the period. Meanwhile, the average TDF’s edge was owed to the fact that such funds have more equity exposure—particularly to large cap U.S. equity—than the typical DC participant.

Since inception of the DC Index in 2006, the average DB plan maintains a healthy average 81 basis point edge over the DC Index’s annual return. The long-term performance of TDFs, in contrast, is in line with that of the DC Index.

Investment Performance

Strong Market Returns Sustain Growth

Bolstered by strong returns, the average DC plan balance grew at a robust 3.47% during the quarter. Market returns accounted for nearly all of the growth (99% of the total). Since inception, the average plan balance has grown a healthy 8.67%. While two-thirds of this growth (5.95%) owes to market performance, the rest is driven by plan sponsor and participant contributions.

Growth Source

Target Date Funds’ Continued Dominance

For the second quarter, TDFs attracted 75 cents for every dollar of flows. This is the lowest amount since September 2013—albeit still quite impressive. Money flowed out of a wide variety of asset classes, from the conservative (money market and stable value) to the more aggressive (U.S. small/mid cap and sector funds). Turnover (i.e., net transfer activity levels within DC plans) for the quarter, at 0.70%, fell in line with the since-inception average (0.69%).

Table

Target Date Funds Narrow the Gap

As noted earlier, U.S. large cap equity remains the single largest allocation in the Index; however, with money continuing to flow out of this asset class and into TDFs, the gap is narrowing. Within capital preservation vehicles, allocations to stable value (10.2%) dwarf those of money market (1.6%), not only due to stable value’s greater prevalence in the large plan market, but also to the fact that when it is offered, stable value tends to attract more assets than money market.

Asset Allocation

Reflecting the strong performance of equity markets during the second quarter, the DC Index’s overall equity allocation now stands at 67.1%. This represents the highest equity allocation for the DC Index since the market collapse. The Index’s equity allocation, however, is well below the current average equity allocation of 2035 TDFs, which stands at 74%.

Equity Exposure