September 7, 2012 (PLANSPONSOR.com) - The size of defined contribution (DC) participants’ balances declined in the second quarter of 2012 by more than 2%, according to the Callan DC Index.
The 2.09% contraction in balances reflected an average 2.56% market loss, which was marginally offset by 0.47% of contribution inflows from participants and plan sponsors. However, because of a strong first quarter, DC participant balances still experienced positive growth totaling 7.65% in the first half of the year. Since the Index’s inception in early 2006, growth in plan balances have owed as much to net inflows (3.13%) as to return growth (3.14%); demonstrating the importance of robust participant savings levels.
DC plans significantly underperformed corporate defined benefit (DB) plans in the second quarter, with DC plans down 2.56% (vs. declines of slightly more than 1% for DB plans). On the other hand, DC plans beat the typical 2030 target-date fund (TDF), which was down more than 3% for the quarter.
Since the Index’s inception, DB has outperformed DC by nearly 2 percentage points on an annualized basis. Over the same period, DC plans have outperformed the average 2030 TDF by about half a percentage point on an annualized basis. Target-date funds’ higher allocation to equities hampered performance over the period. Despite their weak performance, TDFs managed to attract assets in the second quarter, as they have every quarter since the Index’s inception. In fact, six out of every ten dollars that moved within the Index in the second quarter flowed into TDFs. The tendency of these funds to attract assets even in down markets may be a reflection of participant inertia as much as actual confidence in these investments. In most cases, TDFs are the default in DC plans.