TDFs Attract Majority of DC Assets

During the third quarter, Callan DC Index balances improved by more than 4%, mostly because of market appreciation.

Defined contribution (DC) plans (4.40%) nearly matched corporate defined benefit plans (4.45%) during the third quarter. However, DC plans trailed the typical 2030 target-date fund (TDF), which posted a front-running 5.34% gain for the quarter.  

TDFs managed to attract the majority of assets, as they have every quarter since 2006. Nearly 70 cents of every dollar that flowed into Index asset classes during the third quarter went to TDFs. This flow data reflects participant and plan sponsor contributions, withdrawals, transfer activity and any changes in the fund or asset class lineup (i.e. fund mappings).  

Several DC investments saw net outflows, with domestic (large and small/mid cap) equities, global equities, and company stock witnessing a material exodus during the quarter. The beneficiaries of the outflows were primarily TDFs and domestic fixed income. Taking all the flows into account, turnover—which reflects net transfer activity levels in the DC Index—more than doubled from a quarter ago, coming in at 1.04% (about 40% higher than typical levels).

Traditional inflation-sensitive asset classes such as real estate investment trusts (REITs) and Real Return/Treasury inflation-protected securities (TIPS) funds saw modest inflows. Stable value funds endured a second consecutive quarter of net outflows, despite offering a premium return to money market funds, which experienced positive flows.  

Domestic large cap retains the biggest share of participant assets in the Index (24.2%). 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 2006. Accordingly, large cap stock has declined as a proportion of the Index from 32% six years ago to just below 25% today. In contrast, TDFs have grown to represent 15.5% 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 down nearly 2 percentage points from a year ago.  

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