Callan DC Index™
Performance, asset allocation, and cash flows of more than 100 large defined contribution plans representing approximately $350 billion in assets are tracked in the Callan DC Index.
Index Posts Fourth Straight Quarterly Gain
The Callan DC Index™ rose 3.8% in 1Q21, marking a fourth straight quarter of gains after a 15.0% 1Q20 plunge. The increase propelled the Index’s trailing one-year return to a staggering 40.7%. The Age 45 Target Date Fund (analogous to the 2040 vintage) posted a larger quarterly gain (4.6%), 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 slightly higher annualized since-inception* return (7.9% vs. 7.2%).
*The Index was incepted in 2006.
Investment Gains Drive Increase in Balances
Balances within the DC Index rose by 3.7%, the fourth straight quarterly gain. Investment returns (3.8%) were the sole driver of the growth, while quarterly net flows (-0.1%) 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
Return to Normal: TDFs Receive Largest Inflows
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. After two straight quarters in which this did not occur, there was a return to normal in 1Q21 as the asset allocation funds received 83.0% of quarterly net inflows.
In a reversal from 4Q20, investors transferred assets out of relatively safer asset classes, as U.S. fixed income (-19.6%), money market (-11.4%), and stable value (-8.2%) had sizable net outflows. These asset classes are most likely to be tapped into by retiring participants meeting cash flow needs or rolling their employer plan balances into an individual retirement account.
On the other hand, U.S. equity also saw net outflows, as U.S. large cap (-25.5%) and U.S. small/mid cap (-3.0%) both drained assets. In contrast, global ex-U.S. equity (11.5%) had the second-largest net inflows, while emerging market equity (-3.4%) experienced modest net outflows.
Net Transfers Increase
Turnover (i.e., net transfer activity levels within DC plans) in the DC Index increased in 1Q, rising to 0.42% from the previous quarter’s measure of 0.14%. The increase brought the quarterly figure closer to the Index’s historical average (0.59%) and signaled that participants have largely stayed the course and not drastically altered their allocations.
Equity Exposure Inches Upward
The Index’s overall allocation to equity increased to 71.1% from the previous quarter’s 70.5%. This came despite the 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 continues to sit well above the Index’s historical average (68.0%).
Equities Gain at Expense of Safer Asset Classes
In a continuation from the previous quarter, U.S. large cap (26.8% total allocation) and U.S. small/mid cap (8.5%) experienced the largest percentage increases in allocation. Strong performance relative to fixed income and other asset classes drove the increases and offset the effect of net outflows from U.S. equities.
Driven by material net outflows and relative underperformance, stable value (8.9% allocation), U.S. fixed income (6.1%), and money market (1.1%) saw the largest decreases in allocation.
Prevalence of Asset Class
Fixed Income Offerings Fluctuate
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.
Despite recent headline attention about potential inflation, the prevalence of a real return/TIPS offering (35.0%) decreased by 2.1 percentage points. Similarly, global/global ex-U.S. fixed income (7.5%) saw a decrease in prevalence of 1.1 percentage points. In contrast, the prevalence of a high yield fixed income offering (6.7%) increased by 1.5 percentage points and reached its highest mark since the first quarter of 2017.
Other notable movements included a 1.8 percentage point increase in the prevalence of a real estate offering (23.3%) and a 1.5 percentage point decrease in the offering of a company stock fund (17.5%).
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.