Callan Associates

The Callan DC Index™

Fourth Quarter 2009

The Callan DC Index™ is an equally weighted index tracking the cash flows and performance of more than 70 plans, representing over 800,000 defined contribution participants and nearly $60 billion in assets. The DC Index is updated quarterly and reflects 401(k) plans as well as other types of defined contribution plans.

Defined contribution plan investors made solid gains in 2009. The average DC plan rose 22.22% for the year according to the Callan DC Index™, doing much to offset the 28.5% loss experienced decline by plans in 2008.

The Callan DC Index™ started the year with a 5.22% annualized decline since its 2006 inception. However, after gaining ground throughout much of 2009, the Index ended the year with an annualized gain of 1%. This puts the Index ahead of the average 2030 target date fund, which has only advanced 0.18% on an annualized basis between 2006 and 2009.¹ Although the average 2030 target date fund has outperformed the average DC plan during the market rally due to a heavier weighting in equities (80% in equities compared to 63% for the Index), it sustained far greater damage during the market collapse, putting it behind the Index for the period dating back to the beginning of 2006.

Still the Index has significantly underperformed the average corporate defined benefit plan since inception by 1.71% on an annualized basis.²

¹ We compare the Index to a 2030 target date fund, because this is the target date fund that roughly matches the time to retirement of the average DC participant.

² This performance edge is partly attributable to the fact that corporate DB plans’ are gross of fees, as opposed to the Index’s returns which are net of fees.

* Performance is gross of fees

Cash Flows

Throughout much of the 2009 market rally, activity as measured by fund flows within the Index, was above average, as participants sought to increase their exposure to risky assets. In the fourth quarter, money continued to flow into most equity funds and out of capital preservation vehicles such as stable value and money market funds. However, the pace of turnover for the three-month period declined to 0.57% (below the historical average).

Nearly 5% of money flowed out of stable value funds in 2009, compared to inflows of nearly 17% in 2008. Target date funds were a major recipient of inflows during the fourth quarter, with 60% of turnover moving into such funds. Target date funds have seen inflows every quarter since the Index’s inception—including throughout the market collapse. This reflects the popularity of target date funds as a default investment option and the stickiness of defaulted monies.

Total Index “turnover” measures the percentage of total invested assets (transfers only, excluding contributions, and withdrawals) that moved between asset classes.

Asset Allocation

Target date funds account for more than 10% of DC assets and are represented in 75% of DC plans. For plans with target date funds, target date assets average 19% of the total. Stable value funds account for 16% of assets, down from more than 18% going into 2009. Despite positive flows and the market rally, the Index’s equity exposure has not returned to pre-market collapse levels. The average plan has about 63% in equities, down from a high of 70.5% in December 2007.