Callan DC Index Suffers First Annual Loss Since 2008

The Callan DC Index bounced back from a disappointing third quarter to post a gain of nearly 7% in the fourth quarter of 2011. 

However, despite three positive quarters during the year, the Index finished in the red, losing more than 1% in 2011—its first annual loss since 2008. The average corporate defined benefit (DB) plan performed significantly better than the DC Index, returning 2.94% for the year. 

The Index has consistently underperformed DB plans in down markets, losing an additional 1.65% during down quarters on average. In contrast, it has slightly outperformed the average DB plan in rising markets, averaging 0.22% more in total return during up quarters.

The typical 2030 target-date fund scored well in the fourth quarter, slightly outperforming the DC Index and the average corporate DC plan, but this has not been the case in the longer term. Since inception, the typical 2030 target-date fund has returned just 1.89% annually, and has tended to lag the DC Index considerably during down markets.

The variability in DB versus DC performance can be partially explained by the differences in diversification between the two plan types: DB plans tend to include allocations to asset classes such as alternatives, which are not generally represented in DC plans. The difference in DC versus 2030 target-date fund performance, in contrast, reflected the greater allocation of the typical 2030 target-date fund to equities than that of the typical DC plan.

Continued Growth Buoyed by Contributions 

For the year, the average DC plan balance grew 1.5% due to plan sponsor and participant contributions, totaling more than 2.5%. Participants with assets in the typical DC plan witnessed just more than 5.5% annual growth in their balances over the past six years, driven mostly by contributions.

Participants Not Eager for Change 

During 2011, turnover (or movement of assets) was at its lowest since the Index’s inception. While typical average calendar year turnover is 3%, in 2011 it was 1.79%. Low turnover likely reflects participant fatigue with turbulent markets.

Despite the hit international equities endured in 2011, both in terms of negative press and actual performance (down 13% according to the Index), this asset class not only held onto assets, but actually netted slightly positive flows. Domestic large cap, on the other hand, lost a relatively paltry 0.79% in total return for the year, but accounted for nearly one-third of outflows. Company stock, a perennial poor performer, accounted for another one-third of outflows. Inflows were strong throughout the year to target-date funds, domestic fixed income and stable value.

Asset Allocation: Reflecting Disquiet 

Real return/TIPS are now prevalent in 30% of plans, up from just less than 6% at the beginning of 2006. This coincides with results from Callan’s 2012 DC Trends Survey, which showed that real return/TIPS was the most commonly added asset class in 2011. Still, real return/TIPS accounted for less than 2% of DC plan assets. In contrast, stable value has seen its prevalence fall from a peak of 69% in 2006 to under 60% in the most recent quarter.

The Index’s overall allocation to equities was 62% at year-end 2011, down from 65% at the beginning of the year. Domestic large cap equity funds continued to represent the Index’s biggest allocation. However, with frequent, significant outflows from that asset class over time, large cap funds’ share of assets within the DC Index fell from 32% to 23% since the Index’s inception.