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.
Index Starts off 2023 With a Gain
The Callan DC Index™ gained 5.3% in 1Q23, which brought the Index’s trailing one-year loss to 5.2%. The Age 45 Target Date Fund (analogous to the 2040 vintage) had a higher quarterly return (6.1%). The higher equity allocation of the Age 45 TDF relative to the Index was the primary driver, as equity markets generally outperformed fixed income markets during the quarter. Over longer time horizons, the Age 45 TDF’s higher relative equity allocation has contributed to a higher annualized since-inception* return (6.6% vs. 6.2%).
Balances within the DC Index rose by 5.3% after a 5.8% increase in the previous quarter. Investment gains (5.3%) were the sole driver of the gain, while net flows (0.03%) had a negligible 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.
Net Transfers Increase
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, which was the case in 1Q23 as the asset allocation funds garnered 90.6% of quarterly net flows. Within equities, investors withdrew assets from U.S. large cap equity (-34.0%), U.S. small/mid-cap equity (-12.0%), and global ex-U.S. equity (-7.1%).
Notably, stable value (-37.7%) saw relatively large outflows for the second consecutive quarter, while money market (2.1%) experienced small net inflows. These results should not come as much of a surprise given the recent interest rate environment and each asset class’s sensitivity to changing rates (i.e., the longer underlying duration of a typical stable value portfolio often leads to underperformance relative to money market funds in a sharply rising rate environment).
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 (42.1%) rose by 1.3 percentage points, the first increase in two years. Other notable movements included a 1.3 percentage point increase in the prevalence of a high yield offering (9.0%) as well as a 1.7 percentage point decrease in the prevalence of stable value (72.9%).
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 third quarter DC Index results.
For plans with assets less than $500 million in assets, the average asset-weighted fee decreased by 1 basis point. Plans with assets between $500 million and $1 billion saw a fee decrease of 2 bps, while the fee for plans with more than $1 billion in assets had the largest decrease of 4 bps. 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.