401(k) Investors Cautiously Return to Equities in October

November 11, 2003 (PLANSPONSOR.com) - As the broader markets showed improvement last month, so too did the flow of 401(k) participant money into equity investments.

Investors began toeing the equity pool once again in October, reversing the move toward fixed income recorded last month, when US equity markets – and participants tracked by the Hewitt 401(K) Index – reversed a shift to equity that began in earnest in April.   Overall, the Index tracks the movement of some 1.5 million participants.

For October, transfers favored equity investments on 14 days, compared with fixed-income for nine, as trading levels remained stagnant.  On average, daily net transfers totaled just 0.07% of the roughly $70 billion in 401(k) balances tracked by Hewitt last month. 

This corresponds withanormal level of relative transfer activity – when the net daily movement of participants’ balances as a percent of total 401(k) balances within the Hewitt 401(k) Index equals between 0.3 times and 1.5 times the average daily net activity of the preceding 12 months.   Since the end of March, the Index has seen only three above-normal transfer days. Last month, the most active transfer day was on October 1, with 0.14% of balances transferring on a net basis in response to a 2% increase in the Dow Jones Industrial Average.

Stock Stuffers

As usual, it was much more common on days when the market rose for money to move into stock funds than into fixed-income funds. Historically, 401(k) participants have elected to follow the market when transferring money – moving into stock funds on positive market days and into fixed-income funds on negative market days.   In October, equity had the lion share of the positive days (61%) to fixed income’s 39%.   

Hardest hit by the outpouring of participant funds was company stock, which accounted for 59.08% of the fund outflow, and GIC/Stable Value that composed 18.89% of the exiting participant dollars.  Bonds were the only other investment to note an outwardly flow (22.02%).

After snapping a six-month winning streak last month, October’s returns came back to the plus column, as the Russell 2000 increased 8.40%, while the NASDAQ was up 8.13%.   Likewise, the Dow Jones Industrial Average came in 5.87% better, and the S&P 500 managed to gain 5.66%.   In the red though was the Lehman Aggregate, down 0.93%.

Allocated Across

There was some shakeup in the overall asset allocation in the Hewitt 401(k) Index from the month before (See 401(k) Participant Flow Into Equities Hits a Wall in September ).  GIC/Stable Value no longer held the majority of participant assets, at 23.25% this category now trails company stock (24.80%). Large US equity (21.93%) held on to the third spot.  Other major holdings included:

  • lifestyle/premix (6.22%)
  • balanced (6.13%)
  • small US equity (3.96%)
  • bond (3.57%).

The steady flow of stock-fund oriented transfers, combined with market strength, has resulted in overall greater stock fund exposure for 401(k) participants’ accounts, Hewitt found. From a low of less than 57% in stock fund investments in February, 2003 (See Bearish Sentiments Send Participants Hibernating ), participant balances now stand at nearly 65% in stock fund investments.

New contributions painted a slightly different picture with GIC/stable value being the most prevalent investment option, comprising more than a quarter (27.26%) of the total.  However, company stock was the third most prevalent holding, with 17.17%, while large US equities were 22.55% of the total, coming in as the second most widely held.  Other major segments were:

  • lifestyle/premixed (7.16%)
  • small US equity (5.32%)
  • bond (5.30%)
  • balanced (4.10%).