The Callan DC Index™
The Callan DC Index™ is an equally weighted index tracking the cash flows and performance of approximately 70 plans, representing more than 800,000 defined contribution participants and over $70 billion in assets. The Index is updated quarterly and reflects 401(k) plans as well as other types of defined contribution plans.
During the first quarter of 2008 defined contribution monies were actively shifting into assets considered safe havens, such as domestic fixed income, stable value, and money market funds. Monies generally flowed from the risky assets that were hit hardest by market volatility during the quarter, such as domestic large cap, domestic small/mid cap, and emerging markets equity.
Asset allocation funds were one major exception in the trend away from traditional, diversified equity-oriented investment funds. In the face of material first quarter declines in everything from Target Date 2020 funds to Target Date 2030+ vehicles, asset allocation funds continued to increase their share of DC assets during the quarter. Asset allocation fund flows currently represent 1.24% of the total Index market value. Net flows include participant and sponsor contributions, withdrawals, transfer activity, and any changes in the fund or asset class line-up. Positive first quarter asset allocation flows also encompass any mapping activity by plan sponsors into asset allocation funds.
Total turnover - a measure of monies shifting between asset classes either due to plan sponsor or participant activity - was above average at 1.05% for the quarter (the historical average is 0.82%). Again, this reflects both participants’ efforts to reduce exposure to risky assets and plan sponsors’ activities, such as the ongoing shift toward asset allocation funds.
Investment Performance
The Callan DC Index™ performance reflected the impact of stock market weakness during the first quarter, as the value of the typical DC plan declined 6.5% over the period - more than a percentage point worse than the typical corporate defined benefit plan. Since the Index’s inception in early 2006, the average DC plan has underperformed the average corporate DB plan by more than 1.8% on an annualized basis. Two factors explain the difference in performance: 1) The average corporate DB plan is shown gross of fees, while the Callan DC Index™ is net of fees; 2) Pension plans enjoy a broader opportunity set (e.g., private equity, real estate, and absolute return strategies).
The Callan DC Index™ outperformed the average target date 2030 fund by nearly two percentage points for the quarter, largely due to asset allocation. The Index’s total equity allocation stood at 65.8% (after steadily declining from a high of over 70% in late 2007), while the typical 2030 target date funds maintained a much higher equity share (roughly 80%), leaving it more exposed to stock market fluctuations.
Asset Allocation
While domestic large cap equity remained the largest component in the Index (at an average of 25% of plans’ assets), weak performance and cash outflows combined to erode domestic large cap’s share by nearly three percentage points over the quarter. The cumulative decrease in domestic large cap over the life of the Index now stands at 6.65%. Domestic small/mid cap also experienced a material decline in weighting - from 9.9% to 8.2% over the course of the first quarter (its weighting declined 4.6% over the life of the Index). In contrast, asset allocation funds now represent 16.1% of average plan assets, a cumulative increase in weighting of 6.9% over the life of the Index. Target date funds account for two-thirds (66.7%) of asset allocation funds offered in the Index.
The expected demise of stable value funds as a significant force within DC plans appears to be premature—at least given recent market conditions. For the first quarter, the average plan had 11.5% in stable value, up from 9.3% in the prior quarter. However, asset growth was flat over the life of the Index.
The Callan DC Index™’s overall equity allocation stands at 65.8% at the end of the first quarter, down materially from its previous mark of 70.2%. Much of this decline represents not just transfer activity, but failure to rebalance in the face of stock market declines.