As usual, participant transfer activity was modest in the Hewitt 401(k) Index, but participants who chose to make a transfer opted for the relative security of GIC/Stable Value ($160 million worth) and bond choices. More than 80% of the transferring balances during the month went into those options, while company stock, international stocks and small cap US equity funds suffered most of the net withdrawals in May, some $200 million, according to Hewitt. .
Hewitt took note of participants’ apparent indifference to the direction of the markets. Just a month earlier, transferring participants were clearly “dumping” equities in favor of fixed income, as stock values fell (see Participants Continue Large US Equity Dump ). Since the beginning of the year, more than $780 million in balances has shifted out of equity funds on a net basis, but this activity has tended to correspond to market weakness, according to Hewitt. Consequently, considering the robust performance of major US equity indices in May (the NASDAQ rose more than 7.6%, the S&P 500 was up 3.01%, and the Dow climbed 2.70%), the continued flight from equities is striking. In another interesting trend, mutual fund windows – generally an investment option that permits investment in mutual funds beyond those offered on a plan’s standard 401(k) menu – drew nearly 11% of the month’s net transfers.
Transfer activity remained mostly at normal levels throughout the month, with an average of just 0.04% of 401(k) balances transferring on a net daily basis, compared with 0.06% the past two Mays, and .07% in May 2002 and 2001. This year the only day of above-average net transfer activity occurred on May 18 – the third day of surging stock prices – and on that day participants shifted to fixed income investments on a net basis. For the month, participant movements favored fixed income choices on a net basis 11 of the 20 days during May.
Despite those moves, participants’ overall allocation to equity investments was 66.2% at the end of May, about in line with 2004 year end levels. Hewitt noted that historically 401(k) participants’ equity exposure, according to the Index, has been as high as 74% (in 2000) and as low as 57% (in 2003). Company stock continued to represent most of the $90 billion represented by the Hewitt 401(k) Index, some 23.14%, but GIC/Stable Value investments comprise 22.33%. Large US equity fund investments add up to another 22.02%. Balanced fund investments are a distant fourth, with 7.43%, followed by lifestyle/pre-mixed offerings with 4.94%, while small US equity funds, international funds, and bond offerings comprise 4.91%, 4.49%, and 3.45%, respectively.
Those allocations seem likely to be sustained based on the flow of new contribution dollars, with nearly a quarter (23.36%) directed toward large US equity investments, one-in-five dollars (19.42%) invested in company stock, and 17.39% invested in GIC/Stable Value. Even when considering participant contributions only, large US equity garnered 26.09% in May, compared with 18.80% for GIC/Stable Value, and 10.65% for company stock. However, lifestyle/pre-mix funds ranked fourth in both categories, drawing 8.07% of total contributions, and nearly 9% of participant contributions, according to the Hewitt data.
Hewitt said that the allocation to equity investments of discretionary contributions (Participant Only Contributions) was 66.0% in May, slightly higher than the allocation to equity investments of discretionary contributions at the end of last year.
The Hewitt 401(k) Index tracks the daily transfer activity of nearly 1.5 million 401(k) plan participants with nearly $90 billion in collective assets.