Limping to the Finish Line
The Callan DC Index™ was dragged down by a weak equity market in the fourth quarter, when it plunged 9.65%, and finished 2018 off 4.87%. Although it is of cold comfort, the DC Index did outperform the typical Age 45 Target Date Fund for the year by over 2 percentage points. This outperformance is largely attributable to the DC Index’s lower equity allocation (69% vs. 76%). While the larger equity allocation of the Age 45 TDF detracted for the year, it has led to higher investment returns since inception (5.94% vs. 5.40%).
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. Fee data is updated annually during the fall.
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: Pain on Both Ends?
With investment returns hurting overall plan balances, inflows typically buoy balances. However, as with the third quarter, flows for the fourth quarter were negative (-0.17%). Net flows will provide a critical measure for how effectively plans retain the balances of retiring workers.
Now for Something Completely Different
For the first time in the history of the DC Index, the story surrounding flows does not involve the inexorable rise of target date funds. Rather, the fourth quarter marked a remarkable reversal (and one that forced much reaffirmation of data). Although target date funds continued to gain net inflows, it was stable value that experienced the largest inflows. Sharp reversals in the broad equity markets may explain some of this presumed flight to safety as money market funds also experienced inflows.
Despite Bumpy Quarter, TDFs Continue to Ascend
With consistent inflows (though not nearly as large during the fourth quarter), target date funds ended the year with a 33% share of assets, up from 31% a year ago. For the year stable value also increased its share (10.7% vs. 9.1%) while both small/mid-cap and international equity dipped 1.3% and 1.0% respectively.
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.
Fewer plans offer company stock (21% vs. 28%) relative to a year ago, while stable value rose in overall prevalence from 71% to 75% for the year.