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.