Callan Associates

The Callan DC Index™

Second Quarter 2010

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 nearly $75 billion in assets. The Index is updated quarterly and reflects 401(k) plans as well as other types of defined contribution plans.

The positive momentum that started in the first quarter of 2010 came to a grinding halt in the second quarter of 2010. The second quarter witnessed the worst quarterly performance since the fourth quarter of 2008. The average defined contribution (DC) plan registered an investment loss of 7.19%, besting the average 2030 target date fund¹ but lagging the average corporate defined benefit (DB) plan.

The miniscule gain in the Index since inception is mostly due to continued participant contributions rather than investment gains. Since its 2006 inception, the Callan DC Index™ has outperformed the average 2030 target date fund by nearly 20 basis points annually, partly due to the higher equity share of the average 2030 fund (80% equity versus 64% for the DC Index). Continuing a trend seen throughout its life, the DC Index underperformed the average corporate DB plan by over 2% for the quarter and nearly 2% since inception.²

¹ We compare the Index to a 2030 target date fund because this fund roughly matches the time to retirement of the average DC participant.

² This performance edge is partly attributable to the fact that corporate DB plans’ are reported gross of fees while the Index’s returns are net of fees.

DC Assets Anemic Growth

The total annualized growth of DC assets (contributions as well as total return) since the Index’s inception in 2006 stands at 2.40%. A paltry 0.11% of the total dollar growth can be attributed to market returns while the lion’s share (2.30%) is due to participant contributions. While markets have not buoyed balances as much as many had hoped, contributions have kept the average participant’s bottom line steady.

Cash Flows: DC Equity Allocation Reverses a Trend

Flows for the second quarter were below the average level established since Index inception. Funds flowed out of equities and into fixed income instruments. For the quarter, the equity share shrunk from 64.5% to 61.3%, reflecting market losses and some transfer activity. This reversed a five-quarter trend in which the equity share of the Index steadily rose.

Domestic large cap equity, international equity and domestic/global balanced all witnessed sizable outflows while fixed income vehicles such as stable value and domestic fixed income saw substantial inflows. Target Date Funds continued their consistent gathering of significant participant inflows.

Total Index “turnover” measures the percentage of total invested assets (transfers only, excluding contributions, and withdrawals) that moved between asset classes.

Asset Allocation: Winners and Losers

Target date funds account for more than 10% of total DC Index assets and make up 18% of assets in plans where they are offered. In plans that offer company stock, allocations have fallen from 22% in 2006 to 14% of plan assets. Real return/TIPS funds continue to be added to fund lineups; they are now offered in over 16% of plans, up from only 4% in 2006. While the share of domestic large cap funds within the Index has fallen from 31.9% in 2006 to 22.8%, the portion of international equity remains unchanged at 7.3%.