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.
Performance
Index Dips for Third Straight Quarter
The Callan DC Index™ fell 4.6% in 3Q22, its third straight quarterly decline, which brought the Index’s trailing one-year loss to 16.7%. The Age 45 Target Date Fund (analogous to the 2040 vintage) had a lower quarterly return (-6.1%). Typically, the higher equity allocation 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, the Age 45 TDF’s bigger relative equity allocation has been additive to performance, leading to a higher annualized since-inception* return (6.0% vs. 5.7%).
Growth sources
Balances within the DC Index declined by 4.7% after a 12.3% decrease the previous quarter. Investment returns (-4.6%) were the primary driver of the decline, while net flows (-0.2%) 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 participants, who often own an outsized share of total plan assets.
Turnover
Net Transfers Fall
Net cash flow analysis
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 taking a back seat to stable value in 2Q22, TDFs reclaimed the top spot, garnering 73.6% of quarterly net flows.
Within equities, investors withdrew assets from U.S. large cap equity (-33.1%) and U.S. small/mid cap equity (-25.3%). Conversely, global ex-U.S. equity experienced net inflows (+9.2%), in perhaps a signal that some investors sought to rebalance their portfolio’s home country bias (i.e., U.S. equity vs. global ex-U.S. equity allocation split).
Other asset classes that saw notable quarterly net flows included brokerage windows (+13.8%), stable value (-10.9%), and U.S. fixed income (-10.5%).
Equity allocation
Asset allocation
Stable value (10.0%), U.S. fixed income (5.9%), and money market (1.3%) were among the asset classes with the largest percentage increases in allocation. The increased allocation to stable value (0.5 percentage points from the previous quarter) came despite investor outflows, signaling the asset class was a relative outperformer.
Within equities, U.S. small/mid cap equity (7.8%) had a slight increase in allocation while U.S. large cap equity (25.0%) and global ex-U.S. equity (4.7%) had slight decreases. The lower allocation to global ex-U.S. equity came despite net inflows, highlighting the relative underperformance.
Prevalence of asset class
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 (40.9%) 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 may have overlapping roles as diversified asset allocation options for participants who prefer to delegate the asset allocation decision to a professional manager.
Other notable movements included a 2.6 percentage point increase in the prevalence of a money market offering (52.3%) as well as a slight decrease in the prevalence of a brokerage window (41.7%).
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.