Callan DC Index Falls Behind Average Corporate DB Plan

The Callan DC Index eked out a negligible 0.23% return in the second quarter of the year.

This put the Index’s return well behind that of the average corporate defined benefit (DB) plan’s 1.31% gain for the period. Since its 2006 inception, the average corporate DB plan has bested the DC Index by more than 1.5 percentage points annually.

The performance of the DC Index compares more favorably to the average 2030 target-date fund (TDF) over the past five and a half years: 3.68% versus 3.30% respectively on an annualized basis. During the second quarter, however, the average 2030 TDF outperformed the DC Index marginally by 23 basis points.

The average 2030 fund has a higher equity allocation than the plans of the DC Index (78% for the 2030 fund versus 65% for the DC Index); the typical corporate DB plan differs from plans in the DC Index by offering greater diversification into such asset classes as alternatives.

In the five and a half years of the Index’s existence, total annualized growth of participant balances clocks in at 6.95%. Notably, half of this growth comes not from investment gains, but from plan sponsor and participant contributions (net flows)—reinforcing the importance of programs such as automatic contribution escalation, which can increase participant deferral levels, Callan said.

As has been the case in every quarter since the Index’s inception, TDFs once again garnered healthy net inflows. In contrast, domestic large cap equity funds and company stock funds saw large outflows—accounting for 51% and 40% of total outflows respectively for the quarter. Overall, though, Index turnover was light at 0.31%, compared to a historical average of 0.71%.

The share of equities in the DC Index continues to hover at around 65%, as it has done all year. While large cap equity has the largest share of plan assets at 23.5%, this is down materially from its high of 32% at the Index’s inception. The typical plan offers four large cap domestic equity funds (about the same number as in early 2006)—the highest number of funds for any asset class except target date funds. The Index’s overall equity allocation has declined nearly 5.5 percentage points since its inception.