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Callan DC Index up 8% in 2016

The Callan DC Index™ ended 2016 with a return of 7.99%, its best year since 2013. The Index reflects the performance, asset allocation, and cash flows of more than 90 large defined contribution (DC) plans representing approximately $150 billion in assets. Despite the turbulent economic and political environment of last year, including the Brexit vote in Great Britain and the specter of Fed rate hikes, the Index did not suffer a single negative quarter as it rode market performance over the course of 2016.

But the Index trailed the Age 45 Target Date Fund, which gained 8.59% for the year. The Age 45 fund is a composite representing the target date fund (TDF) vintage that a 45-year-old participant (the approximate age of the typical DC participant) would have held in any given year. In rising markets TDFs tend to outperform the DC Index because they typically hold more equities: 74% for the Age 45 fund versus 67% for the average DC plan in the Index. The Index also has a much lower allocation to diversifiers such as emerging market equities, which rose 12% in 2016.

In an unusual shift, Index flows retreated from equity funds into stable value, money market, and U.S. fixed income funds. Typically DC plan participants tend to chase strongly performing asset classes, but they did not in 2016, possibly due to concerns about geopolitical issues such as Brexit.

TDFs dominated net inflows, both for the fourth quarter and the year. In the quarter TDFs attracted more than 68 cents of every dollar that moved within DC plans, and roughly 61 cents of every dollar over the year. TDFs now account for 29% of the average DC plan; over time Callan believes they will account for the majority of assets in DC plans.