Strong Start to the Year
After a rough finish to 2018, the Callan DC Index™ rebounded in the first quarter of 2019, gaining 9.6%. The Age 45 Target Date Fund posted even stronger results, gaining 11.2%. This outperformance is largely attributable to the Age 45 TDF’s higher equity allocation (78% vs. 69%). While the larger equity allocation hurt performance for the TDF in 2018, it has contributed to higher returns since inception (6.7% vs. 6.0%).
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. Fee data is updated annually during the fall.
Fees decreased across all plan sizes. This was 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.
Balances See Sizable Gains
Strong investment returns, coupled with positive flows, led to a sizable growth in balances for the quarter. The growth in flows marked a reversal from two consecutive quarters of negative flows, while investment gains made heavy contributions, helping to recover from a rocky fourth quarter (-9.7%). The 9.8% total gain in market value for the quarter marked the highest since the first quarter of 2012 (9.9%). Net flows will continue to provide a critical measure for how effective plans are at retaining the balances of retiring workers.
Back to Normal?
After an aberration in the fourth quarter, target date funds once again saw the largest inflows in the first quarter. Moreover, stable value experienced relatively large outflows after having the largest inflows the previous quarter. Despite a strong performance by equity in the first quarter, both U.S. and non-U.S. equity saw large outflows at the same time that U.S. fixed and money market experienced relatively large inflows, perhaps indicating a general shift toward safer securities within the core lineup.
Net Transfers Increase in the First Quarter
First quarter turnover (i.e., net transfer activity levels within DC plans) in the DC Index increased slightly to 0.48% from the previous quarter’s 0.41%. Turnover has now risen for two consecutive quarters but still sits well below the historical average (0.61%).
Stable Value Continues Steady Ascension
In the prevalence of funds table, the green bars indicate the prevalence of asset classes within DC plans, and the blue bars measure the average allocation to that particular asset class when offered as an option.
Stable value’s prevalence within DC plans rose for the sixth consecutive quarter and is now at 76%, up approximately 4 percentage points from a year ago. This could be in response to the premium afforded to stable value relative to money market options. Additionally, more plans are now offering emerging market equity (18%) as an investment option compared to the previous quarter.
The presence of company stock (21%) continues to decline, alongside asset classes such as global equity (16%).