Callan DC Index™
Underlying fund performance, asset allocation, and cash flows of more than 100 large defined contribution plans representing approximately $400 billion in assets are tracked in the Callan DC Index.
Performance
Index Kicks Off 2024 with a Gain
The Callan DC Index™ gained 6.6% in 1Q24, which brought the Index’s trailing one-year gain to 18.8%. The Age 45 Target Date Fund (analogous to the 2040 vintage) had a higher quarterly return (7.3%). Over longer time horizons, the Age 45 TDF’s higher relative equity allocation has contributed to a higher annualized since-inception* return (7.3% vs. 6.8%).
*The Index was created in 2006.
Growth sources
Investment Gains Lead to Rise in Balances
Balances within the DC Index rose by 6.6% after a 9.0% increase in the previous quarter. Investment gains (6.6%) were the sole driver of the gain, while net flows (0.03%) had a negligible effect. This figure will continue to provide a critical measure of how effectively plans retain the balances of retiring participants, who often own an outsized share of total plan assets.
Turnover
Net Transfers Increase
Turnover (i.e., net transfer activity levels within DC plans) in the DC Index increased to 0.44% from the previous quarter’s measure of 0.24%. The Index’s historical average (0.55%) remained steady.
Net cash flow analysis
TDFs Remain in Top Spot, Stable Value Declines Sharply
Automatic features and their appeal to “do-it-for-me” investors typically result in target date funds (TDFs) receiving the largest net inflows in the DC Index, which was the case in 1Q24 as the asset allocation funds garnered 79.5% of quarterly net flows. Within equities, investors withdrew assets from U.S. small/mid-cap equity (-12.7%) and company stock (-15.6%).
Notably, stable value (-50.9%) saw relatively large outflows for the sixth consecutive quarter. These results should not come as much of a surprise given the recent interest rate environment and each asset class’s sensitivity to changing rates (i.e., the longer underlying duration of a typical stable value portfolio often leads to underperformance relative to money market funds in a sharply rising rate environment).
Equity allocation
Equity Exposure Rises
The Index’s overall allocation to equity (73.5%) rose slightly from the previous quarter’s level (72.5%). The current equity allocation continues to sit above the Index’s historical average (68.6%).
Asset allocation
Fixed Income Exposure Falls
U.S. large cap equity (27.8%) and target date funds (35.3%) were among the asset classes with the largest percentage increases in allocation, while stable value (6.6%) had the largest decrease in allocation from the previous quarter due to net outflows. A decreased allocation to U.S. fixed income (-0.30 percentage points from the previous quarter) came despite investor inflows, signaling the asset class was a relative underperformer. Another core option, global ex-U.S. equity (5.0%), had a decrease in allocation from the previous quarter’s level (5.1%).
Prevalence of asset class
Money Market Funds Rise
In the prevalence of funds table, the green bars indicate the prevalence of asset classes within DC plans, while the blue bars show the average allocation to particular asset classes when offered as an option.
The prevalence of money market funds (54.3%) rose by 1.8 percentage points along with an increase in the prevalence of brokerage windows (42.9%) by 1.0 percentage points. In contrast, the prevalence of emerging market equity (19.3%) fell by 0.6 percentage points. Other notable movements included a 0.9 percentage point increase in the prevalence of a real return/TIPS offerings (33.6%).
Management fee data
The DC Fee Analysis chart shows the average total investment management fee by plan size, as well as the average share of plan assets allocated to active and passive options. Fees for each fund (including mutual funds, collective investment trusts, and separate accounts) within a plan are asset-weighted to determine the average total fee. This exhibit will be updated annually with the release of third quarter DC Index results.
For plans with assets less than $500 million in assets, the average asset-weighted fee decreased by 3 basis points. Plans with assets between $500 million and $1 billion saw the largest fee decrease of 9 bps, while the fee for plans with more than $1 billion in assets had a decrease of 4 bps. Fee decreases were largely driven by a combination of increased use of passive mandates as well as lower breakpoints and new lower fee vehicles and share classes for actively managed options.