Callan DC Index™
Underlying fund performance, asset allocation, and cash flows of more than 100 large defined contribution plans representing approximately $400 billion in assets are tracked in the Callan DC Index.
Index Falls to Begin Year
The Callan DC Index™ fell 5.3% in 1Q22, a reversal from its 4Q21 gain (5.0%). The quarterly decline brought the Index’s trailing one-year return to 4.8%. The Age 45 Target Date Fund (analogous to the 2040 vintage) had a slightly lower quarterly return (-5.9%). Typically, the higher equity of the Age 45 TDF relative to the Index is the primary driver of return differences. However, given quarterly declines in both equity and fixed income markets, relative equity allocations had a much more muted impact, and instead the presence of diversifiers such as private real estate and sub-allocations within equity and fixed income (e.g., capitalization, style, and sector exposures) had more pronounced impacts on relative returns. Over longer time horizons, however, the Age 45 TDF’s bigger relative equity allocation has been additive to performance, leading to a higher since-inception* return (7.5% vs. 7.0%).
*The Index was created in 2006.
Investment Losses Drive Decline in Balances
Balances within the DC Index declined by 5.4% after a 4.4% increase the previous quarter. Investment returns (-5.3%) were the primary driver of the decline, while net flows (-0.1%) also had a negative, albeit much smaller, 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 Transfers Rise
Turnover (i.e., net transfer activity levels within DC plans) in the DC Index increased to 0.42% from the previous quarter’s measure of 0.19%. Despite the increase, the Index’s historical average (0.57%) remained unchanged and signaled that most participants have continued to stay the course and not drastically altered their allocations.
Net cash flow analysis
TDFs Stay Atop Leaderboard, Stable Value a Close 2nd
Automatic features and their appeal to “do-it-for-me” investors typically result in target date funds (TDFs) receiving the largest net inflows in the DC Index. And for the fifth straight quarter, the asset allocation funds placed atop the leaderboard, receiving 48.4% of net inflows.
In a quarter that saw declines in both equity and fixed income markets, investors transferred assets out of U.S. large-cap equity (-47.4%), U.S. small/mid-cap equity (-16.5%), global ex-U.S. equity (-3.1%), and U.S. fixed income (-17.1%). Many of these investors may have been seeking stability, as stable value garnered the second-largest quarterly net inflows (42.2%), its highest level since 4Q20. Money market funds also saw net inflows (3.3%), although at a much lower level than stable value.
Equity Exposure Falls Slightly
The Index’s overall allocation to equity (72.0%) fell from the previous quarter’s level (72.8%), which had been within reach of the Index’s high mark of 4Q07 (72.9%). The decrease was driven by both investor outflows and declines in equity markets. Despite the decrease, the current allocation continues to sit well above the Index’s historical average (68.3%).
U.S. Equity Falls; Target Date Funds and Stable Value Gain
In a reversal from the previous quarter, U.S. large cap (26.9%) and U.S. small/mid cap (8.3%) had the largest percentage decreases in allocation. Global ex-U.S. equity (5.0%) and U.S. fixed income (5.4%) also saw declines.
On the other hand, target date funds (32.6%) and stable value (8.6%) had the largest percentage increases in allocation, while money market (1.1%) also saw a slight increase.
Prevalence of asset class
Balanced Funds Dips Again to Lowest Recorded Level
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 balanced fund (43.2%) decreased again to its lowest level since the inception of the Index in 2006. This does not come as much of a surprise given that balanced funds and target date funds can have overlapping roles as asset allocation options for participants who prefer to delegate the asset allocation decision to a professional manager.
Other notable movements included a 2.2 percentage point increase in the prevalence of a money market offering (50.8%) as well as a slight increase in the prevalence of a real return/TIPS fund (34.1%). This may be a signal that some plan sponsors have responded to the current inflationary environment by looking to provide participants with an investment option that has an explicit objective of providing a degree of inflation sensitivity.
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 1 basis point to 0.26%. Plans with less than $500 million in assets saw a slightly larger fee decrease of 3 bps to 0.30%, while the fee for plans with assets between $500 million and $1 billion decreased 1 basis point to 0.35%. 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.