Participants Continue To Bail on Bonds

September 10, 2003 (PLANSPONSOR.com) - Participants continued to shift money into equity investments last month, according to the results of the Hewitt 401(k) Index.

That shift marked a continuation of the trend that began in April, when US equity markets – and participants tracked by the Hewitt 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.  

Transfers favored fixed income investments on just seven days in August, while trading levels remained firmly in normal trading ranges.   On average, daily net transfers totaled just 0.06% of the roughly $70 billion in 401(k) balances tracked by Hewitt last month, compared to 0.08% a year ago.   Hewitt notes that since the start of the major market rebound in April, there has been only one above-average day of net transfer activity ( June 3, see  June Transfers Favor Equity Investments – But Not Company Stock ) .

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Bond “Bail”

Those transfers continued to flow from bonds – nearly two-thirds of the month’s transfers came from those investments – while most of the rest came from company stock.   In fact, bond funds have been hit the hardest by transfers, with over $240 million flowing out of bond funds in August alone, and over $750 million flowing out since the beginning of April, according to Hewitt.   Small US equity funds sopped up about 30% of August’s transfer flows, while nearly 19% went into GIC/Stable value, and 13% went to international investments.

In August the Russell 2000 surged 4.5% while the NASDAQ was 4.35% higher, and the Wilshire 5000 rose 2.25%.   The Dow was 1.97% higher, and the S&P 500 gained 1.79%.   Both the Dow and the S&P 500 have risen for six straight months, while the NASDAQ has now gained ground seven months in a row.   The last time the Dow had six or more straight monthly gains was an eight-month run from December 1994 through July 1995. The S&P last had a six-month rally from January through June 1996, and the last time the NASDAQ had such a long winning streak was the 10-month period that ran from December 1994 through September 1995.

Still “Standing”

When the dust settled, the overall asset allocation in the Hewitt 401(k) Index was largely unchanged from the month before (see    Rising Markets, Temps Tempt Transfers ).   GIC/stable value was the most prevalent, comprising roughly a quarter of the total.   Company stock remained the second most represented holding, with 24.50%, while large US equities were roughly 21% of the total.   Other major segments were balanced offerings (7.19%), lifestyle/premixed (4.76%), and bond funds (3.84%).   At the end of August, the stock allocation of the Index reached 62% of total balances, bringing the level back to its July 2002 level, from a low of 56.6% in February of 2003 (see  Transfers Heat Up While Markets Melt Down in July ).

New contributions largely matched that mixture, with 23.6% going to GIC/stable value, 23.66% going to large US equity, and company stock drawing 18.4%.   Lifestyle/premixed captured 6.36% of new contribution dollars, while bond funds got 6.21%, and balanced funds drew 4.76%.

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.

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