DB beats DC in unequal race

The average corporate defined-benefit plan in the US has outperformed the Callan DC index by 1.61 per cent since 2006, although this is partly due to a difference in fee reporting.

Since the index’s inception five years ago, the index has reported annualised returns of 3.14 per cent, while the average corporate defined benefit plan has reported 4.75 per cent.

Corporate defined-benefit funds report returns gross of fees while the returns of the Callan DC index are net of fees.

The Callan DC index, which is an equally weighted index tracking the cash flows and performance of more than 70 DC plans and $80 billion in assets, shows that assets in the index have grown 6.34 per cent since inception, divided equally between positive performance and net inflows from plan sponsors and participant contributions.

Flow analysis shows that target date funds and domestic fixed income were the biggest beneficiaries for the year to the end of December 2010, while domestic large-cap equity, international equity and stable value all experienced outflows for the year.

The share of equity funds in the index grew in the year, from 62.5 to 64.9 per cent, but below the index’s all-time high of 70.5 per cent at the end of 2006.

Callan DC Index asset allocation as at December 31, 2010

Target date funds 10.5%
Brokerage window 1.5%
Company stock 6.9%
Domestic fixed income 9.3%
Domestic large cap 24.1%
Domestic small/mid cap 10.6%
Domestic/global balanced 12.2%
Emerging markets equity 0.4%
International/global equity 7.7%
Money market 3.1%
Stable value 12.2%
Other 1.5%