The Callan DC Index™ is an equally weighted index tracking the cash flows and performance of over 80 plans, representing more than 800,000 DC participants and over $100 billion in assets. The Index is updated quarterly and reflects 401(k) plans as well as other types of DC plans.
The Callan DC Index™ returned a healthy 5.45% during the third quarter, reflecting strong equity market performance. Economic data in the U.S. was weak during the quarter, prompting the Fed to delay its tapering of quantitative easing. The equity markets responded by rallying, even as domestic fixed income remained anemic.
The average 2035 target date fund had an impressive showing, outperforming the average defined contribution (DC) plan by 77 basis points. This reflects target date funds’ greater allocation to equities (77% for the average 2035 target date fund versus 66% in the typical DC plan). At the same time, the typical DC plan outperformed the average corporate defined benefit (DB) plan by about 1%. Lagging DB performance may be attributable to such plans’ exposure to longer-term fixed income (e.g., through liability driven investment strategies). The Barclays Long Government Index, for example, lost more than 2% during the quarter. The typical corporate defined benefit plan has a greater allocation to longer-term fixed income, far less exposure to capital preservation vehicles, and more in alternatives than the typical DC plan.
Since the Index’s inception in 2006, the average corporate DB plan has outperformed DC plans by about 1% annually. Conversely, target date funds have underperformed both DB and DC since inception; target date funds have tended to outperform in strong markets, and underperform in weak markets.
DC balances grew 5.6%, driven mostly by market returns. Meanwhile, plan sponsor and participant contributions (net flows) added just 0.14% to growth during the quarter. This represents the fifth consecutive quarter of growth for the DC Index. Since the Index’s 2006 inception, annual growth in balances has totaled 7.98%. Investment returns have accounted for 5.06% of this growth, while net inflows have accounted for 2.92% annually.
Target date funds were the clear cash flow winner during the quarter, taking in more than seventy cents of every dollar that flowed into DC funds in the third quarter. Indeed, target dates may be on pace to have their best year of inflows in the Index’s history in 2013. In contrast, most other asset classes experienced net outflows—including strong-performing domestic large cap equity. Stable value and money markets did manage to hold their own, with net inflows of 13.87% and 7.2%, respectively. Flow data reflects participant and plan sponsor contributions, withdrawals, transfer activity, and any changes in the fund or asset class lineup (e.g., fund mappings). Turnover came in a bit lower than average for the quarter (i.e., net transfer activity levels within DC plans), at 0.60% the Index’s average historical quarterly turnover is 0.70%.
Target date funds are well on their way to becoming the single largest holding in the typical DC plan, accounting for one-fifth of total asset allocation (20.1%) within the DC Index. Only domestic large cap equity allocations are higher, at 23.3%. While target date funds have never experienced a quarter of net outflows since the DC Index’s 2006 inception, domestic large cap equity has seen outflows more than two-thirds of the time—including the third quarter. Within the 83% of plans offering target date funds, the target date funds allocation is 27%.
Overall, the DC Index’s total equity allocation has increased to nearly two-thirds (65.6%) of DC plans’ assets. This allocation has remained fairly static over the past several quarters and is well below the DC Index’s historic high of more than 70%, reached prior to March 2008.