Even with the average defined benefit (DB) plan setting the bar low, with a -7.08% quarterly return, the DC Index still trailed by nearly 4.5 percentage points. This widened the performance spread between the DC Index and the average DB plan to 2.3 percentage points since the inception of the DC Index in 2006.
Even given this poor performance, the DC Index still bested the average 2030 target-date fund during the third quarter. This continues a longer-term trend whereby the average comparable target date fund has tended to underperform the DC Index during market downturns and outperformed in market rallies.
This is largely attributable to target-date funds having considerably more in equities than the average DC participant’s portfolio. The average 2030 fund currently has 78% in equities, compared to 61% in the DC Index. Participants’ lower equity allocations may reflect both greater risk aversion and failure to rebalance during down markets. The net result of this phenomenon during the very volatile, nearly six-year duration of the DC Index is that target date funds have underperformed by an average 60 basis points annually (0.75% versus 1.35%).
Since inception, total annualized growth of participant balances stands at 4.47%, with about 70% due to plan sponsor and participant contributions. Returns have only contributed 1.35% of the total. Given market weakness, programs that help participants increase deferral levels (e.g., automatic contribution escalation) are more important than ever.
Despite the market turmoil, participant reaction was muted in the third quarter. Overall, DC Index turnover was in line with the historical average at 0.71%. When money moved, it generally fled into capital preservation vehicles, with money market and stable value funds accounting for nearly half of all inflows. Domestic equity funds (large and small/mid cap) lost the most assets during the third quarter, comprising two-thirds of outflows during that period. While target-date funds continued to see net inflows during the quarter, balanced funds experienced net outflows. Target-date funds remain the only asset class in the DC Index that have avoided net outflows on a quarterly basis—undoubtedly due in large part to the inertia of people automatically enrolled in such funds.
With assets flowing to fixed income during the quarter and equity markets declining, the overall share of equities in the DC Index fell to 61%, a low not seen since mid-2009. Large cap equity funds continued to house the majority of assets; however, with frequent, significant outflows over time, large cap funds’ share of assets within the DC Index has fallen from 32% to 23% since inception.