Callan DC Index™​

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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.

Performance

Index Dips for Second Straight Quarter

The Callan DC Index™ fell 12.2% in 2Q22, the Index’s third-largest quarterly decline since its inception (only 4Q08 and 1Q20 had larger declines). The decline was the Index’s second straight after a 5.3% loss in 1Q22 and brought the Index’s year-to-date return to -16.9%. The Age 45 Target Date Fund (analogous to the 2040 vintage) had a slightly lower quarterly return (-13.4%). 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 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 (6.5% vs. 6.1%).

Growth sources

Balances Take a Hit
Balances within the DC Index declined by 12.3% after a 5.4% decrease the previous quarter. Investment returns (-12.2%) 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.

Turnover

Net Transfers Fall

Turnover (i.e., net transfer activity levels within DC plans) in the DC Index decreased to 0.37% from the previous quarter’s measure of 0.42%. Despite the decrease, 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—even in the presence of heightened market volatility.

Net cash flow analysis

Stable Value Edges Out TDFs for Top Spot

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. However, bucking the trend observed over the five previous quarters, TDFs (29.1% of net flows) took a back seat to stable value, which received 47.7% of net flows in perhaps a signal that some participants sought a flight to safety in the face of declining equity and fixed income markets.

Similarly, money market saw positive net flows (+9.8%), while U.S. large-cap equity (-48.1%), U.S. small/mid-cap equity (-17.5%), and U.S. fixed income (-19.5%) had negative net flows. Global ex-U.S. equity (+1.1%) had small but positive net flows while emerging market equity (-0.5%) saw little change. Also of note, real return/TIPS (0.6%) did not attract a large share of flows, even as inflation has remained at elevated levels.

Equity allocation

Equity Exposure Falls
The Index’s overall allocation to equity (69.8%) fell meaningfully from the previous quarter’s level (72.0%), which had been within reach of the Index’s high mark of 4Q07 (72.9%). The decrease was driven by a combination of investor outflows and declines in equity markets. Despite the decrease, the current allocation continues to sit above the Index’s historical average (68.3%).

Asset allocation

U.S. Equity Falls; Stable Value and U.S. Fixed Income Gain

In a continuation from the previous quarter, U.S. large cap (25.1%) and U.S. small/mid cap (7.7%) had the largest percentage decreases in allocation. Global ex-U.S. equity (4.9%) and global equity (0.5%) also saw small declines.

On the other hand, stable value (10.0%) and U.S. fixed income (5.8%) had the largest percentage increases in allocation. The increased allocation to stable value (+1.5% from the previous quarter) was driven by both investor inflows and the relative outperformance of the asset class.

Prevalence of asset class

Prevalence of 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 (41.4%) decreased again to its lowest level since the inception of the Index in 2006. This should 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 1.1 percentage point decrease in the prevalence of a money market offering (49.6%) as well as a slight decrease in the prevalence of a real return/TIPS fund (33.1%). On the other hand, the prevalence of a real estate offering (21.8%) increased by 0.6 percentage points.

Management fee data

The DC Fee Analysis chart shows the average total investment management fee by plan size, as well as the average share of plan assets allocated to active and passive options. 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 exhibit will be updated annually with the release of 3Q DC Index results.

For plans with more than $1 billion in assets, the average asset-weighted fee decreased by 1 basis point. Plans with assets between $500 million and $1 billion also saw a fee decrease of 1 basis point, while the fee for plans with assets less than $500 million had the largest decrease of 3 basis points. 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 actively managed options.

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