Investing October 15, 2003

401(k) Participant Flow Into Equities Hits a Wall in September

October 15, 2003 (PLANSPONSOR.com) - As the broader markets turned down last month, so too did the flow of 401(k) participant money into equity investments.

Reported by

Eric Hazard

The slowdown of the participant migration into equities out of fixed-income reverses a trend that began in earnest in April,when US equity markets – and participants tracked by the Hewitt 401(K) Index – reversed a year-long shift to fixed income and stable value investments in the Hewitt Index, which tracks the movements of some 1.5 million participants.

For September though, transfers favored fixed-income investments on 11 days, compared with equities for 10, as trading levels inched slightly upward. On average, daily net transfers totaled just 0.07% of the roughly $70 billion in 401(k) balances tracked by Hewitt last month. Even with the tilt toward fixed income, $160 million had still been transferred out of fixed-income funds.

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 moving into fixed-income funds on negative market days. Hewitt notes t ransferring money moved primarily into large and small US equity funds in September. Since the end of March, in all, over $1.4 billion has transferred into these two asset classes on a net basis.

Hardest hit by the outpouring of participant funds was company stock, which accounted for 44.98% of the fund outflow, and GIC/Stable Value that composed 28.73% of the exit participant dollars. Other outwardly flows were noted among bonds, money markets and specialty sector investments.

Red ink bled across September’s returns sheets as the Russell 2000 fell 1.85% while the NASDAQ was off by 1.30%. The Dow was 1.36% lower, and the S&P 500 gave back 1.06%. The negative returns snapped a six month winning streak for both the Dow and the S&P 500, while the NASDAQ must now start over after gaining ground for seven months in a row.

Allocated Across

The overall asset allocation in the Hewitt 401(k) Index was mostly the same than the month before (See Participants Continue To Bail on Bonds). GIC/Stable Value held the majority of participant assets (25.42%) followed by company stock (24.17%) and large US equity (21.02%). Other major holdings included:

lifestyle/premix (6.06%)
balanced (6.02%)
bond (3.88%)
small US equity (2.35%).

Thus, as September drew to a close,the stock allocation of the Index remained flat at 62% of total balances, retaining its July 2002 level, after reaching a low of 56.6% in February of 2003 (See Transfers Heat Up While Markets Melt Down in July).

New contributions painted a slightly different picture with GIC/stable value being the most prevalent investment option, comprising roughly a quarter (23.73%) of the total. However, company stock was the third most prevalent holding, with 20.06%, while large US equities were 22.90% of the total, coming in as the second most widely held. Other major segments were:

lifestyle/premixed (6.49%)
bond (5.41%)
money market (5.24%)
small US equity (4.63%)
balanced offerings (4.06%).

A “normal” level of relative transfer activity is 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.