Decline in Equity Could Have Significant Impact on Retirement Income

March 16, 2009 (PLANSPONSOR.com) - The Callan DC Index declined 15.5% in the fourth quarter for a total loss of more than 28% for the year.

While the DC Index results lagged that of the average corporate DB plan by over 3% (-12.19%) for the quarter, it bested the average 2030 target date fund’s performance (-20.20%) by a significant margin.¬†Callan said the Index outperformed as a result of participants’ failure to rebalance their accounts, which resulted in declining equity allocations going into the worst of the downturn.

Using its capital market assumptions, Callan estimates that the year over year reduction in equity allocation could shave 0.60% annually from participants’ total return over a 20-year period. This translates into 10% less annualized, inflation-protected income per year in retirement, Callan said.

Fixed income reached an all time high of 42.3% within the Index, compared to a low of 29.5% a year ago and an average of 32.2%. Market performance, failure to rebalance and transfers out all contributed to the trend away from equities.

DC participants engaged in little transfer activity. Total Index turnover declined to 0.51% in the fourth quarter from 1.13% in the previous quarter, well under the historical average of 0.77% over the life of the Index.

When monies were transferred, movements were generally away from equities and into “safe haven” asset classes, according to Callan. Nearly two-thirds (65%) of flows went into stable value during the quarter, with target date funds capturing most of the rest. Flows include participant contributions and target date funds remain a very popular default option within DC plans.

Monies flowed out of domestic/global balanced, domestic small/mid cap, global, international and emerging markets, as well as real return/TIPS and specialty equity.

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