The 2.09%
contraction in balances reflected an average 2.56% market loss, which was
marginally offset by 0.47% of contribution inflows from participants and plan
sponsors. However, because of a strong first quarter, DC participant balances
still experienced positive growth totaling 7.65% over the first half. Since the
Index’s inception in early 2006, growth in plan balances have owed as much to
net inflows (3.13%) as to return growth (3.14%); demonstrating the importance
of robust participant savings levels.
DC plans significantly underperformed corporate defined benefit
(DB) plans in the second quarter, with DC plans down 2.56% (vs. declines of slightly more
than 1% for DB plans). On the other hand, DC plans beat the typical 2030 target-date
fund (TDF), which was down more than 3% for the quarter.
Since the
Index’s inception, DB has outperformed DC by nearly 2 percentage points on an
annualized basis. Over the same period, DC plans have outperformed the average
2030 TDF by about half a percentage point on an annualized basis. Target-date
funds’ higher allocation to equities hampered performance over the period.
Despite
their weak performance, TDFs managed to attract assets in the second quarter,
as they have every quarter since the Index’s inception. In fact, six out of
every ten dollars that moved within the Index in the second quarter flowed into
TDFs. The tendency of these funds to attract monies even in down markets may be
a reflection of participant inertia as much as actual confidence in these
investments. In most cases, TDFs are the default in DC plans.
Most other DC investments saw net outflows during the quarter,
with domestic large-cap, company stock and domestic small- to mid-cap particularly hard hit
by outflows. However, turnover—which reflects net transfer activity levels in the DC
Index—was modest during the quarter, coming in at 0.43% (about 60% of typical
levels). This likely owes to the fact that participants typically do not react strongly to short periods of
market weakness.
Domestic large-cap retains the biggest share of participant assets
in the Index (24.3%). This asset class also has the distinction of having experienced
quarterly net outflows more often than any other major asset class outside of company stock; with net
outflows occurring nearly two-thirds of the time since the Index’s inception.
Accordingly, large-cap stock has declined as a proportion of the Index from 32%
in 2006 to just below 25% today. In contrast, target date funds have grown to
represent 14.4% of overall Index assets (or more than 20% of assets in plans where
they are available). Overall equity assets stand at 63.5%, which is slightly
down from the first quarter.
The purpose
of the Callan DC Index is to understand the asset allocation, track fund flows
and measure the performance of DC plans. The equally weighted index
tracks cash flows and performance of nearly 80 plans,
representing greater than 800,000 DC participants and over $100 billion in
assets. It is updated quarterly and reflects 401(k) plans as well
as other types of DC plans.
Highlights
of the index can be accessed here.