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 bounces back in 4Q
The Callan DC Index™ gained 5.1% in 4Q21, rebounding from its 3Q21 decline (-0.4%). The quarterly gain boosted the Index’s trailing one-year return to 15.0%. The Age 45 Target Date Fund (analogous to the 2040 vintage) had a slightly higher quarterly return (5.5%), attributable to its larger allocation to equity, which outperformed fixed income during the quarter. In addition, the Age 45 TDF’s bigger relative equity allocation has contributed to a slightly higher annualized since-inception* return (8.1% vs. 7.5%).
*The Index was created in 2006.
Balances tick back up
Balances within the DC Index rose by 4.4% after a 0.7% decline the previous quarter. Investment returns (5.1%) were the sole driver of the growth, offset by net flows (-0.7%). 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
TDFs, inflation-sensitive assets 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. And for the fourth straight quarter, the asset allocation funds placed atop the leaderboard, receiving 77.9% of net inflows.
For the second straight quarter, real return/TIPS had larger-than-typical net inflows (+13.6%), an indication that more participants may be looking to hedge future inflation in light of heightened inflation concerns and the impact from geopolitical events.
In 4Q21, investors transferred assets out of less-risky asset classes, as stable value (-15.6%), U.S. fixed income (-8.2%), and money market (-3.4%) experienced net outflows. It is worthwhile to note, however, that these asset classes are among those most likely to be tapped into by retiring participants meeting cash flow needs or rolling their DC plan balances into an individual retirement account.
On the other hand, U.S. equity also saw material net outflows, as U.S. large cap (-40.4%) and U.S. small/mid cap (-10.4%) both drained assets. In contrast, global ex-U.S. equity (+5.1%) saw net inflows, while emerging market equity (+0.1%) experienced relatively little change.
Net transfers remain steady
Turnover (i.e., net transfer activity levels within DC plans) in the DC Index remained at 0.19%, consistent with the level in 3Q. The lack of change slightly reduced the Index’s historical average (0.57%) and signaled that participants have continued to stay the course and not drastically altered their allocations.
Equity exposure increases again, nearing high mark of 4Q07
The Index’s overall allocation to equity (72.8%) increased from the previous quarter’s level (72.2%), bringing the allocation within reach of the high mark of 4Q07 (72.9%). The increase was primarily driven by higher allocations to U.S. large cap and small/mid cap, as investment gains for U.S. equities more than offset the effect of net outflows. The current allocation continues to sit well above the Index’s historical average (68.2%).
U.S. equity allocation increases despite net outflows
In a reversal from the previous quarter, U.S. large cap (27.7%) and U.S. small/mid cap (8.7%) had the largest percentage increases in allocation. The increases came despite net outflows, signaling that the relative outperformance of U.S. equity drove the higher overall allocations. Global ex-U.S. equity (5.2%), global equity (0.5%), and emerging market equity (0.2%) saw slight decreases.
On the other hand, target date funds (31.9%) and real return/TIPS (0.5%) also saw increased allocations, partially driven by net inflows. Conversely, U.S. fixed income (5.5%), balanced (5.1%), and brokerage windows (2.5%) experienced the largest percentage decreases in allocation from 3Q.
Prevalence of asset class
Prevalence of balanced funds dips 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 (44.1%) decreased 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 geared for participants who prefer to delegate the asset allocation decision to a professional manager.
Other notable movements included a 1.8 percentage point decrease in the prevalence of a real estate offering (22.8%) as well as three-quarters of a percentage point increase in the prevalence of a real return/TIPS fund (33.8%).
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.