DC Index Performance Benefits From Lack of Non-U.S. Equity Diversification
The Callan DC Index™ rebounded from first quarter losses, returning a reasonable 1.76% in the second quarter. The DC Index’s second-quarter performance outpaced the 1.11% gain of the Age 45 Target Date Fund (TDF). TDFs suffered from their higher relative allocation to non-U.S. equity (the MSCI ACWI ex USA Index dropped -2.61%) and emerging markets (the MSCI Emerging Markets Index plunged -7.96%). The average DC plan has a 5.6% allocation to non-U.S. equity and emerging markets, while the Age 45 Target Date Fund has an allocation of 26.5%.
Since inception, the DC Index’s annual return of 6.18% has trailed the Age 45 Target Date Fund by 70 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.
Mega plans have driven down their fees to an average of 33 basis points, as a result of their scale and ability to invest in institutionally structured vehicles, while smaller plans pay progressively more.
Growth Fueled by Markets
DC plan balances grew by 1.88%, driven primarily by market performance. For the quarter, inflows (participant and plan sponsor contributions) accounted for only 12 basis points of the total growth. Since inception, plan sponsor and participant contributions have more significantly impacted balances and are responsible for approximately one-fourth of the annualized 8.12% total growth in balances.
Target Date Funds Dominate Inflows
Target date funds attracted the majority of assets during the quarter, absorbing approximately 92 cents of every dollar that flowed into DC funds.
Several DC investments saw material net outflows, including U.S. equities (large and small/mid cap), U.S./global balanced, U.S. fixed income, non-U.S. equities, stable value, and company stock.
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.
While TDFs have a larger overall weight within the Index, they remain less prevalent than the next largest plan holding, U.S. large cap equity. When TDFs are held within a DC plan (92% of plans offer them), they account for 35% of plan assets. Meanwhile, U.S. large cap equity funds account for 24% of plan assets, even though they are offered by 100% of DC plans.