Callan Associates

The Callan DC Index™

First Quarter 2010

The Callan DC Index™ is an equally weighted index tracking the cash flows and performance of more than 70 plans, representing greater than 800,000 defined contribution participants and nearly $75 billion in assets. The Index is updated quarterly and reflects 401(k) plans as well as other types of defined contribution plans.

Defined contribution plan investors did well during the first quarter of 2010. The average DC Plan gained 4.03%, beating both the average 2030 target date fund and the average corporate defined benefit plan.¹

The first quarter increase continued the positive momentum from 2009, during which the average DC plan gained 22.2%. Since its 2006 inception, the Callan DC Index™ has outperformed the average 2030 target date fund by more than 80 basis points annually. The higher equity share of the average 2030 fund (80% versus 64% for the DC Index) partly explains the disparity. In turn, the DC Index (1.89%) trailed the average corporate DB plan (3.44%) by an annualized 1.55% since its inception.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.

DC Assets Continue to Grow

DC assets’ total annual growth rate (contributions as well as total return) since the Index’s inception stands at 5.30%. Market returns comprise 1.89%, while participants’ contributions account for 3.41% of this growth. These statistics point to the importance of robust and consistent saving by DC plan participants; in the current market environment, DC participants cannot expect investment returns to make up for shortfalls in their own contribution levels.

Mixed Bag of Flows

For the first quarter, activity as measured by fund flows within the Index registered above average. However, the direction of flows was mixed. While risky asset classes such as emerging markets and small cap equity witnessed minor outflows, large cap equity and international equity both gained assets. Likewise, money flowed into less-risky domestic fixed income money market funds, but out of stable value.

In keeping with a trend seen over the life of the Index, target date funds were a major recipient of inflows during the first quarter. Being a popular Qualified Default Investment Alternative and have experienced inflows every quarter during the life of the Index.

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

DC Equity Allocation Continues to Rise

Target date funds account for more than 10% of DC assets and are represented in 77% of DC plans. Target date assets average 18% of the total assets in plans that offer them. Despite accounting for only 0.32% of assets, real return/TIPS funds are now offered in nearly 16% of plans, a dramatic increase since March 2006 when they were offered in only 6% of plans. Though the allocation to large cap domestic equity increased from the previous quarter, since the Index’s inception it dropped from 31.8% to the current 24.5%. Over the same period, the share of assets in domestic/global balanced has nearly doubled from 5.8% to 11.8%.

The overall assets in equity funds within the Index stands at 64.5%, an increase from the all-time low of 55% set during the first quarter of 2009.