Callan DC Index™
Performance, asset allocation, and cash flows of over 90 large defined contribution plans representing approximately $250 billion in assets are tracked in the Callan DC Index.
Index Caps off 2020 with a Third Straight Quarterly Gain
The Callan DC Index™ rose 11.2% in 4Q20, the third straight quarter of gains after a 15.0% 1Q20 plunge. The increase further boosted the Index’s calendar-year return (15.1%). The Age 45 Target Date Fund (analogous to the 2040 vintage) posted a larger gain (13.4%), attributable to its higher allocation to equity, which outperformed fixed income during the quarter. In addition, the Age 45 TDF’s higher relative equity allocation has contributed to a higher annualized since-inception* return (7.7% vs. 7.0%).
Balances Increase for Third Time in 2020
Balances within the DC Index rose by 10.7%, the third straight quarter with an increase. The quarter’s robust investment returns (11.2%) were the sole driver of the growth, while quarterly net flows (-0.5%) had a small, negative effect. This figure will continue to provide a critical measure of how effectively plans retain the balances of retiring workers, who often own an outsized share of total plan assets.
Net Cash Flow Analysis
Stable Value and U.S. Fixed Income Attract Largest Inflows
Automatic features and their appeal to “do-it-for-me” investors typically result in target date funds receiving the largest net inflows in the DC Index. The asset allocation funds, however, took a back seat for the second straight quarter, receiving only 0.6% of quarterly net inflows.
Similar to 3Q20, investors expressed an appetite for relatively safer asset classes, as stable value (66.5%) and U.S. fixed income (9.8%) received sizable net inflows. It is important to keep in mind that DC participants using the core lineup tend to be older, have relatively large balances, and may be better financially positioned to contribute more. In addition, by the fourth quarter of a calendar year, some DC participants may have already reached contribution limits, meaning flow data may deviate from other quarters given a potentially smaller subset of participants making contributions.
On the other hand, global equity received its largest-ever quarterly net inflows (6.5%). Conversely, investors reduced allocations to U.S. equities, as U.S. large cap (-47.1%) and U.S. small/mid cap (-26.4%) had the largest percentage of net outflows. Global ex-U.S. equity (-2.7%) also saw net outflows, albeit much smaller than its U.S. equity counterpart.
Net Transfers Decrease
Turnover (i.e., net transfer activity levels within DC plans) in the DC Index decreased sharply in 4Q, declining to 0.14% from the previous quarter’s measure of 0.75%. This signals that participants primarily stayed the course and did not drastically alter their allocations. This quarter’s turnover figure fell well below the Index’s historical average (0.59%) and marked the lowest the figure has been since 3Q18.
Equity Exposure Sees Significant Increase
The Index’s overall allocation to equity increased notably to 70.5% from the previous quarter’s 68.8%. The increased allocation comes despite large net outflows in U.S. large cap and small/mid cap, signaling that relatively strong returns in equity markets drove the higher allocation. The current allocation now sits well above the Index’s historical average (67.9%).
Equities Gain Assets at Expense of Safer Asset Classes
After experiencing the largest percentage decrease in allocation the previous quarter, U.S. small/mid cap had the biggest increase in 4Q, bringing the overall allocation to 8.2%. U.S. large cap also experienced a notable, albeit smaller, increase in allocation, to 26.4% from 26.0% in 3Q. Strong performance relative to fixed income and other asset classes drove the increases and offset the effect of net outflows from U.S. equities.
Despite positive and sizable net inflows, stable value (9.1%) experienced the largest decrease in allocation, signaling that the asset class was a relative underperformer. Similarly, U.S. fixed income (6.3%) had the second-largest decrease, while money market funds (1.4%) also saw a modest reduction.
Prevalence of Asset Class
Money Market Offerings Dip
In the prevalence of funds table, the green bars indicate the prevalence of asset classes within DC plans, while the blue bars show the average allocation to particular asset classes when offered as an option.
The prevalence of a money market offering (47.4%) decreased by 1.7 percentage points after rising by a similar amount the previous quarter. Many more DC plans continue to offer a stable value option (75.9%).
On the other hand, the prevalence of a high yield fixed income option (5.2%) and a global fixed income option (8.6%) both increased by 0.9%.
Management Fee Data
The DC Fee Analysis chart shows the average total investment management fee by plan size, as well as the active and passive exposures. Fees for each fund (including mutual funds, collective trusts, and separate accounts) within a plan are asset-weighted to determine the average total fee. This fee will be updated annually with the release of the third quarter DC Index results.
For plans with more than $1 billion in assets, the average asset-weighted fee decreased by 2 basis points to 0.27%. Plans with less than $500 million in assets saw a slightly larger fee decrease of 4 bps to 0.33%, while the fee for plans with assets between $500 million and $1 billion remained steady at 0.36%. Fee decreases were largely driven by a combination of increased use of passive mandates as well as lower breakpoints and new lower fee vehicles and share classes for active options.