Latest Publications
Quick links to Callan's latest quarterly newsletters:
- Capital Market Review 4th Quarter 2011
- DC Observer 3rd Quarter 2011
- Hedge Fund Monitor3rd Quarter 2011
- Private Markets Trends Fall 2011
Third Quarter 2011
The Callan DC Index™ is an equally weighted index tracking the cash flows and performance of more than 70 plans, representing greater than 800,000 defined contribution participants and more than $80 billion in assets. The Index is updated quarterly and reflects 401(k) plans as well as other types of defined contribution plans.
The DC Index Shades of 2008
Reminiscent of the 2008 market collapse, the Callan DC Index™ suffered a loss of 11.45% in the third quarter of 2011. Even with the average defined benefit (DB) plan setting the bar low with a -7.08 % quarterly return, the DC Index still trailed by nearly 4.5 percentage points. This widened the performance spread between the DC Index and the average DB plan to 2.3 percentage points since the inception of the DC Index in 2006.1
Even given this poor performance, the DC Index still bested the average 2030 target date fund during the third quarter.2 This continues a longer-term trend whereby the average comparable target date fund has tended to underperform the DC Index during market downturns and outperformed in market rallies. This is largely attributable to target date funds having considerably more in equities than the average DC participant’s portfolio. The average 2030 fund currently has 78% in equities, compared to 61% in the DC Index. Participants’ lower equity allocations may reflect both greater risk aversion and failure to rebalance during down markets. The net result of this phenomenon during the very volatile, nearly six-year duration of the DC Index is that target date funds have underperformed by an average 60 basis points annually (0.75% versus 1.35%).
1This performance edge is partly attributable to the fact that corporate DB plan returns are reported gross of fees while the Index’s returns are net of fees.
2The 2030 target date fund is used as a benchmark because such funds are best suited to DC Index participants given their average age.
Continued Growth Buoyed by Contributions
Since inception, total annualized growth of participant balances stands at 4.47%, with about 70% due to plan sponsor and participant contributions. Returns have only contributed 1.35% of the total. Given market weakness, programs that help participants increase deferral levels (e.g., automatic contribution escalation) are more important than ever.
Participants Mostly Stay Put
As has been the case in every quarter since the Index’s inception, target date funds once again garnered healthy net inflows.3 In contrast, domestic large cap equity funds and company stock funds saw large outflows—accounting for 51% and 40% of total outflows respectively for the quarter. Overall, though, Index turnover was light at 0.31%, compared to a historical average of 0.71%.
3Total Index “turnover” measures the percentage of total invested assets (transfers only, excluding contributions and withdrawals) that moved between asset classes.
Asset Allocation: 65% is Magic Number
The share of equities in the DC Index continues to hover at around 65%, as it has done all year. While large cap equity has the largest share of plan assets at 23.5%, this is down materially from its high of 32% at the Index’s inception. The typical plan offers four large cap domestic equity funds (about the same number as in early 2006) - the highest number of funds for any asset class except target date funds. The Index’s overall equity allocation has declined nearly 5.5 percentage points since its inception.
