DC Plans Gain During Eventful Year
The Callan DC Index™ ended 2016 with a return of 7.99%, the Index’s best year since 2013.
Despite the Brexit turmoil, a tumultuous U.S. presidential election, and the specter of additional rate hikes by the Federal Reserve, the Index did not suffer a single negative quarter during the year and ended solidly with a fourth quarter return of 1.59%.
But for the year the Index trailed the Age 45 Target Date Fund, which gained 8.59% in 2016. In rising markets target date funds (TDF) tend to outperform the DC Index because the average TDF has a higher allocation to equities than the average DC plan: 74% for the Age 45 Target Date Fund versus 67% for the average DC plan. The DC Index also has a much lower allocation to diversifiers such as emerging market equities, which rose 12% in 2016.
Strong Growth Bolstered by Market Performance
For the year ended December 31, 2016, DC plan balances increased 8.31%. Almost all of the growth is attributable to market performance. Inflows (participant and plan sponsor contributions) were modest for the year, adding only 32 basis points to total growth. Over the long term, plan sponsor and participant contributions have tended to play a larger role, accounting for almost a third of the total growth in balances (2.15% annualized) since the Index’s inception.
Participants Flee Standalone Equities
Normally, when markets are strong, participants stand pat in equity funds. Not in 2016. Last year, flows retreated from equities into stable value, money market, and domestic fixed income funds. Meanwhile, U.S. large cap, non-U.S. equity, and company stock funds all experienced outflows every quarter during the year. As usual, target date funds dominated net inflows for the quarter and the year. In the fourth quarter, TDFs attracted over 68 cents of every dollar that moved within DC plans. For the year, roughly 61 cents of every dollar flowed to TDFs.
Peak in TDF Prevalence
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 chart shows that TDFs’ dominance of the typical DC plan continues to grow. When TDFs are held within a DC plan, they now account for 35% of plan assets, up from 30% a year ago. Compare this to the next largest plan holding, U.S. large cap equity funds, which now account for 22.7% of plan assets—down from 24% a year ago. The fourth quarter of 2016 marks the highest level of TDF prevalence (91%) since the inception of the Callan DC Index™.