The Callan DC Index™ is an equally weighted index tracking the cash flows and performance of nearly 90 plans, representing more than one million DC participants and over $140 billion in assets. The Index is updated eight to 10 weeks after the end of the quarter and reflects 401(k) plans as well as other types of DC plans.
During the first quarter of 2014, the Callan DC Index™ eked out a modest 1.50% gain in choppy market conditions. The broad market rallied and—as measured by the S&P 500 Index—finished the quarter at just over 1.8%. U.S. fixed income also finished the quarter in similar fashion (the Barclays Aggregate Index was up 1.84%), with corporate credit leading the way.
After extremely strong relative performance in 2013, defined contribution (DC) plans trailed defined benefit (DB) plans by 57 basis points in the first quarter of 2014. DC plans tend to be more concentrated in U.S. equities and have little exposure to longer-term fixed income. This worked for such plans in 2013, but was little help in early 2014. In addition, corporate DB plans tend to hold more real assets, such as private real estate and REITs, which exhibited strong absolute returns during the quarter. Since the 2006 inception of the Index, DB plans have outperformed DC plans by an annualized 78 basis points. For the quarter and since inception, the average 2035 target date fund, on the other hand, has performed in line with DC plans.
The average DC plan balance increased 1.82%. Market returns accounted for most of the total growth (82%), with plan sponsor and participant contributions accounting for just under 20%, combined. Over time, however, plan sponsor and participant contributions have had a greater impact on balances and are responsible for one-third of the total growth in balances (2.79% annualized) since the Index’s inception.
Target date funds have been attracting substantial asset flows over the past several quarters. Nearly 90 cents of every dollar that moved within DC plans headed for target date funds in the first quarter, which is the highest proportion since the Index’s inception. Conversely, stable value has been shedding assets, with nearly 40% of outflows coming from this asset class during the quarter. Other asset classes were not spared, as more than half of the asset classes in the DC Index experienced net outflows. Still, overall turnover (i.e., net transfer activity levels within DC plans) was modest at 0.48%, and well below the historical average (0.69%).
U.S. equity is the single-largest holding in a typical DC plan, accounting for nearly one-quarter of total assets (23.6%). It is closely followed by target date funds (21.5%), which have been consistently gaining assets. Despite recent outflows, U.S. small/mid cap equities and stable value remain the third and fourth largest allocations in the DC Index, respectively.
Overall, the DC Index’s total equity allocation has increased to over two-thirds (66.7%) of DC plans’ assets. Since the end of 2012, the equity allocation has been trending slightly upward; however, more recently it has leveled off. It remains below the DC Index’s historic high of more than 70%, reached prior to March 2008.