Target-date funds could claim the largest share of defined contribution plan asset allocations within the next five years based on the funds' current growth rate, said Lori Lucas, executive vice president and defined contribution practice leader at Callan Associates.
Target-date funds account for 15.7% of DC plans' asset allocation as measured by the quarterly Callan DC Index. As of Dec. 31, the target-date fund allocation trails only the domestic large-cap equity allocation at 23.3%. Stable value is third with 12.4%.
That five-year timetable could be accelerated if more DC plans use re-enrollment, “in which the entire plan is mapped into the target-date funds, and participants must elect to move their monies into other investments if they seek a different allocation,” Ms. Lucas wrote in an e-mail.
“So far, less than 10% of plans have done re-enrollment,” Ms. Lucas added. “However, this activity could pick up.”
The latest Callan DC Index, issued Tuesday, shows target-date funds attracted 45.34% of the net inflows for the fourth quarter and 63.31% for the full year.
While target-date funds were enjoying big fourth-quarter inflows, domestic large-cap stocks, domestic small/midcap stocks and company stock funds experienced fourth-quarter net outflows of 45%, 28.8% and 22.6%, respectively, according to the report.
For the full year, the average DC plan balance rose 14.32% with most of the gain coming from growth in investment returns vs. inflows and contributions from participants and sponsors. The average balance rose 1.69% in the fourth quarter, also primarily from investment returns.
The Callan DC Index is an equally weighted index that tracks cash flow and performance of 79 plans, most of which are 401(k) plans. The plans have aggregate assets over $100 billion and cover more than 800,000 participants.
