Market Gains Drove Highest Quarterly Return for DC Plans Since 2013

By Ted Godbout • June 21, 2017 • 0 Comments
DC plans were on the receiving end of strong market performance during the first quarter of this year, rising 4.67%, its highest quarterly return since year-end 2013, according to the latest Callan DC Index.

Despite the strong gains, Callan notes that its DC Index, which tracks performance, asset allocation and cash flows of more than 90 large defined contribution plans, trailed behind the average comparable target date fund, such as the Age 45 Target Date Fund, which rose 5.57%.

In explaining the difference, Callan points out that the average TDF has a higher allocation to equities than the average DC plan. The report shows, for example, that 76% of the Age 45 TDF is in equities, compared to 69% for the DC Index. (The index’s historical average is 67%.)

Callan also emphasizes that a lack of diversification to non-U.S. and emerging market equities was a factor in the DC Index not performing as well as the Age 45 TDF. The Age 45 TDF allocated 20.1% to non-U.S. and 5.2% to emerging market equities, while the average DC plan allocated 5.2% and 0.3%, respectively.

The report further shows that investment returns accounted for nearly all of the overall 4.74% increase in plan balances, with plan contributions adding a mere 0.07%. Callan notes that since the inception of the DC Index, total contributions generally have accounted for about one quarter of its growth (2.11% of 7.84%).

Other highlights of the report show that TDFs drew nearly 89 cents of every dollar that moved within DC plans. “When TDFs are held within a DC plan, they now account for 32% of plan assets,” notes Lori Lucas, head of Callan’s DC practice. She emphasizes that the next largest plan holding, U.S. large cap equity funds, account for less than 23% of plan assets. By comparison, U.S. large cap equity accounted for more than 30% of the average plan’s assets in 2006, the report shows.