Callan DC Index™​

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Performance, asset allocation, and cash flows of more than 100 large defined contribution plans representing approximately $350 billion in assets are tracked in the Callan DC Index.

Performance

Index Posts Fifth Straight Quarterly Gain

The Callan DC Index™ rose 5.8% in 2Q21, marking a fifth straight quarter of gains after a 15.0% 1Q20 plunge. The increase brought the Index’s trailing one-year return to a robust 29.4%. The Age 45 Target Date Fund (analogous to the 2040 vintage) posted a larger quarterly gain (6.3%), attributable to its higher allocation to equity, which outperformed fixed income during the quarter. In addition, the Age 45 TDF’s higher relative equity allocation has contributed to a slightly higher annualized since-inception* return (8.1% vs. 7.4%).

Growth Sources

Investment Gains Drive Increase in Balances

Balances within the DC Index rose by 5.7%, the fifth straight quarterly gain. Investment returns (5.8%) were the sole driver of the growth, while quarterly net flows (-0.1%) had a small, negative effect. This figure will continue to provide a critical measure of how effectively plans retain the balances of retiring workers, who often own an outsized share of total plan assets.

Net Cash Flow Analysis

Status Quo: TDFs Continue to Receive Largest Inflows

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. For the second straight quarter, the asset allocation funds placed atop the leaderboard, receiving 78.1% of net inflows.

In a continuation from 1Q21, investors transferred assets out of relatively safer asset classes, as stable value (-28.1%), U.S. fixed income (-17.7%), and money market (-9.8%) had sizable net outflows. These asset classes are most likely to be tapped into by retiring participants meeting cash flow needs or rolling their DC plan balances into an individual retirement account.

On the other hand, U.S. equity also saw net outflows, as U.S. large cap (-27.5%) and U.S. small/mid cap (-1.8%) both drained assets. In contrast, global ex-U.S. equity (8.6%) had the second-largest net inflows for the second straight quarter, while emerging market equity (0.5%) experienced modest net inflows.

Turnover

Net Transfers Decrease

Turnover (i.e., net transfer activity levels within DC plans) in the DC Index decreased slightly in 2Q, falling to 0.37% from the previous quarter’s measure of 0.42%. The decrease brought the quarterly figure farther from the Index’s historical average (0.59%) and signaled that participants have largely continued to stay the course and not drastically altered their allocations.

Equity Allocation

Equity Exposure Hits Highest Mark Since 4Q07

The Index’s overall allocation to equity (72.2%) increased by more than a full percentage point from the previous quarter’s mark (71.1%), bringing the allocation to its highest level since 4Q07 (72.9%). The increase came despite net outflows in U.S. large cap and small/mid cap, signaling that continued strong returns in equity markets drove the higher allocation. The current allocation sits well above the Index’s historical average (68.1%).

Asset Allocation

Equities Gain at Expense of Safer Asset Classes

In a continuation from the previous quarter, U.S. large cap (27.5%) had the largest percentage increase in allocation, while U.S. small/mid cap (8.6%) also had a small, albeit more modest, increase. Strong performance relative to fixed income and other asset classes drove the increases and offset the effect of net outflows from U.S. equities. In addition, global ex-U.S. equity (5.3%), global equity (0.6%), and emerging market equity (0.3%) also saw small increases.

On the other hand, stable value (8.1%) and U.S. fixed income (5.8%) saw the largest decreases in allocation, driven by material net outflows and relative underperformance.

Driven by material net outflows and relative underperformance, stable value (8.9% allocation), U.S. fixed income (6.1%), and money market (1.1%) saw the largest decreases in allocation.

Prevalence of Asset Class

Prevalence of Specialty Fixed Income Offerings Increases

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 high yield fixed income offering (7.9%) increased to its highest mark since 3Q16 (14.1%). In addition, global/global ex-U.S. fixed income (8.7%) also saw an increase in prevalence of more than a full percentage point.

Other notable movements included a 1.2 percentage point increase in the prevalence of a brokerage window (42.1%) and a 1.5 percentage point decrease in the offering of a balanced fund (47.6%).

Management Fee Data

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 with the release of the third quarter DC Index results.

For plans with more than $1 billion in assets, the average asset-weighted fee decreased by 2 basis points to 0.27%. Plans with less than $500 million in assets saw a slightly larger fee decrease of 4 bps to 0.33%, while the fee for plans with assets between $500 million and $1 billion remained steady at 0.36%. 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 active options.

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