DC Index Performance Benefits From Lack of Non-U.S. Equity Diversification
The Callan DC Index™ accelerated gains in the third quarter, posting a respectable 3.65% return. The DC Index’s performance outpaced the 3.53% gain of the Age 45 Target Date Fund (TDF). Some of this outperformance can be explained by the higher home country bias of the DC Index. The all-cap Russell 3000 Index, reflecting U.S. stocks, returned 7.12% while the broad MSCI ACWI-ex USA Index returned 0.71% for the quarter. The average DC plan has a 5.3% allocation to non-U.S. equity and emerging markets, while the Age 45 Target Date Fund has an allocation of 25.9%.
While the DC Index has outpaced the Age 45 TDF this quarter and for the year to date, since inception the DC Index’s annual return of 6.36% has trailed the Age 45 TDF by 65 basis points.
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.
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.
Outflows: Is this the beginning?
DC plan balances grew by 3.14%, driven completely by market performance. For the first time since the third quarter of 2016, flows into the DC Index were negative. With aging demographics and those older participants typically having the largest balances, it remains an open question whether outflows become the norm.
Target Date Funds Dominate Inflows
As usual, target date funds attracted the majority of assets during the quarter, absorbing approximately 64 cents of every dollar that flowed into DC funds.
Several DC investments saw material net outflows, including U.S. large cap, U.S./global balanced, non-U.S. equities, and stable value. On the other side of the ledger, small/mid-cap equity and money market saw sizable inflows.
TDF Allocations Dominate
In the prevalence of funds table, the green bars indicate the prevalence of asset classes in DC plans and the blue bars measure the average allocation to that particular asset class when offered as an option.
The share of plans offering a brokerage window increased from 34% a year ago to 42% in the recent third quarter. Within capital preservation, the share of plans offering a money market option dropped from 51% to 43% while stable value is now offered in 73% of plans versus 69% a year ago.