401(k) Transfer Activity Low in August, Participants Move To Bonds

September 8, 2004 (PLANSPONSOR.com) - As has been the story for much of the second half of the year, less-than-robust equity returns sent investors to fixed-income investments, but at little more than a trickle.

Even though improved from previous months, which saw transfer activity levels at historic lows (See  Hewitt: July Sees Light K Plan Transfers ), August’s transfer activity among 401(k) participants was still below normal for the Hewitt Associates 401(k) Index.   Historically, just under 0.07% of 401(k) balances have transferred per day on a net basis; in August participants transferred just 0.05% of their balances.

The transfer activity that was recorded went toward fixed-income investment options on 73% of all trading days in August, the traditional bastion of down market days.   However, equity returns, as measured by the S&P 500, were in positive territory more days (11) than they were down (10).  

Investors behaved as could be expected on the S&P 500’s worst day, August 16.   On that day, participants shifted the majority of their transfer funds to the plan’s money market option (40%), followed by bond funds (24%) and GIC/Stable Value (14%).    By comparison, the majority of 401(k) funds shifted out of company stock investments (53%), followed by large US equity (28%) and small US equity (15%) offerings on that day.

Examining monthly transfer/cash flow data for the month on the whole, Hewitt found most inflows be directed into GIC/Stable Value (63.74%) followed by bond funds (29.17%) and money market (6.75%) offerings.   On the other side, leading the outflows was Large US Equity (-35.10%), Company stock (-22.27%) and Small US Equity (-20.35%).

Overall, any irrational participant behavior and lower than average transfer activity can be traced back to the broader markets with only marginally positive returns.   Leading the way was the Lehman Aggregate (1.91%), followed by the Dow Jones Industrial Average (0.58%), the MSCI EAFE (0.44%) and the S&P 500 (0.40%).   Ending the month lower was the NASDAQ (-2.61%) and the Russell 2000 (-0.51%).

August’s data release had another surprise, as this month marked the unveiling of a new metric to the Index:   Participant Contributions. Hewitt said the new enhancement enables the firm to share more information about 401(k) participants’ decisions and how they are allocating personal future contributions to their 401(k) plan. In 2004, 401(k) participants allocated an average of 65% of their contributions to stock funds. The highest allocation of the year was in February and March, when 66% of contribution allocations were in stock funds. The lowest allocation has been in August, when participant allocations to stock funds eased to 63%.

A copy of August’s data release is available at   http://was4.hewitt.com/hewitt/services/401k/observ/04_august.htm.