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Fourth Quarter 2012

The Callan DC Index™ is an equally weighted index tracking the cash flows and performance of nearly 80 plans, representing more than 800,000 defined contribution participants and over $100 billion in assets. The Index is updated quarterly and reflects 401(k) plans as well as other types of defined contribution plans.

Market Returns Fuel DC Asset Growth

The Callan DC Index™ balances swelled by 14.32% in 2012. Building on the year’s early momentum, balances grew 1.69% in the fourth quarter. This gain was mostly attributable to return growth (+1.52%) rather than inflows or plan sponsor and participant contributions (+0.17%). Since the Index’s 2006 inception, growth has been largely driven by investment returns (+3.77%). However, inflows (+2.96%) have also made a significant contribution. This attests to the importance of plan contributions in helping employees achieve their retirement savings goals.

Despite this growth, DC plan returns slightly lagged the average corporate defined benefit plan. While DC plans earned 12.28% for the year, DB plans gained an even better 12.67%. Since the Index’s inception, DB plans beat DC plans by an average of 1.81% annually. Target date funds had a strong showing in 2012, with the average 2030 fund up 13.69% for the year. Since the Index’s inception, however, target date funds lag both the average DB and DC plans, reflecting poor performance during market downturns.

Target Date Assets Wax as Domestic Equity Wanes

Target date funds attracted the majority of fund flows during the fourth quarter, as well as the year as a whole. In 2012, target date funds attracted nearly two-thirds (63.3%) of every dollar that flowed within DC plans. This flow data reflects participant and plan sponsor contributions, withdrawals, transfer activity, and any changes in the fund or asset-class lineup.

Both the quarter and the year saw outflows from company stock funds, reflecting a longer-term trend for DC plans. Domestic equity—both large cap and small/mid cap—also experienced net outflows for the year. Domestic and international equities saw outflows during the fourth quarter likely largely due to uncertainty related to the Fiscal Cliff. Both money market and stable value funds experienced net inflows during the same period, reflecting their perceived safe-haven status.

Turnover in the DC Index nearly doubled compared to 2011. In fact, at 3.52%, annual turnover in 2012 was the highest since the Index’s inception. A lot of the activity occurred in the first quarter, when markets rose sharply and turnover reached 1.33%. By contrast, fourth quarter turnover was 0.73%.

Domestic Large Cap Shrinks

Domestic large cap equity’s share of DC assets continues to contract, while target date funds’ share continues to edge up. While domestic large cap once held 32% of assets, it now accounts for a little over 23%. On the other hand, target date funds have grown to nearly 16% of DC plan assets. At this rate, it is only a matter of time before target date funds claim the largest slice of the DC asset allocation pie. Overall equity exposure stands at 62.8%, which is consistent with last year (62.0%), though far below the pre-economic crisis high of 70.5% reached in December 2007.

© Callan Associates Inc.