Hewitt: 401(k) Participants Rush Back To Equities

May 11, 2004 (PLANSPONSOR.com) - Bucking a trend set in March of retreating to bonds in the face of market weakness, 401(k) participants voted in favor of stocks in April.

April equity investments inflow – favored on 71% of the days in the month – was a bit of an anomaly since investors historically have favored stock investments on days when the broader markets have been positive. Yet, in the month, the S&P 500 was up only 11 days while investors clamored into equity investments on 15 days, according to data aggregated for Hewitt Associates 401(k) Index.

The remaining six trading days in April – 29% of the total – saw investors turning to bond investments.   By comparison, in March participants favored fixed-income options on 70% of days, an exodus that made March 2004 the most bearish month of transfers since early 2003 (See  K Plan Participants Transfer To Bonds in March ).   Part of the shift in participant behavior from March to April Hewitt attributed to investors concerns about the direction of interest rates, as overall bond investments experienced the greatest outflows from 401(k) participant accounts.  

Outside of perceived fears about a possible hike in interest rates, Hewitt also said investors may be turning to stock as a sign of confidence in a sustained recovery of the equity markets.   To support this contention, Hewitt notes year-to-date in 2004, more than 70% of contributions have been directed to stock investments, compared to 63% in 2003 and 68% in 2002.  

April held firm to 2004’s trend.   Leading all other categories in terms of greatest monthly inflows was Small U.S. Equity with a 41.44% inflow, followed by other equity categories:

  • Large U.S. Equity – 22.61%
  • International – 15.00%
  • Mid U.S. Equity – 14.04%
  • Self-Directed Window – 3.46%
  • Emerging Markets – 3.45%.

Outflows, on the other hand, were dominated by bonds a category that recorded an outflow of 67.69% in April.   This was followed by outflows of 19.14% in money markets, 10.14% in company stock, 1.85% in GIC/Stable Value, 0.90% in Balanced, 0.15% in Lifestyle/Pre-Mix and 0.14% in Specialty/Sector.

Overall, transfer activity in April was light with average daily net transfers totaling just under 0.05% of the roughly $70 billion in 401(k) balances tracked by Hewitt, as there were only two days when transfer activity exceeded normal levels in April.   One of those days, April 22, was rather peculiar as investors moved toward fixed income despite the S&P 500’s 1.41% gain, the highest gain of the month.

Participant Allocations

As April drew to a close, the majority of participant funds were held in Company Stock (24.42%), followed by GIC/Stable Value (22.76%) and Large U.S. Equity (22.02%).  Other holdings included:

  • lifestyle/premix (6.24%)
  • balanced (6.18%)
  • small U.S. equity (4.56%)
  • international (3.65%)
  • bond (3.16%)
  • mid U.S. equity (2.61%)
  • money market (2.52%)
  • self-directed window (1.31%)
  • emerging markets (0.42%)
  • specialty/sector (0.14%).

Other than Company Stock making up the lion’s share of new contributions in April (27.93%), new money into 401(k) investments followed a slightly different path than asset allocations.   After company stock, Large U.S. Equity took in 21.37% of new participant funds, followed by 16.47% going into GIC/Stable Value.  The rest of the contributions shook out as:

  • lifestyle/pre-mix (7.63%)
  • small U.S. equity (6.20%)
  • bond (4.95%)
  • international (4.06%)
  • mid U.S. equity (3.50%)
  • balanced (3.52%)
  • money market (2.66%)
  • self-directed window (0.97%)
  • emerging markets (0.62%)
  • specialty/sector (0.18%).

The benchmarks were uniformly down in April.   Leading the descent was the Russell 2000 (-5.10%), followed by:

  • Nasdaq (-3.71%)
  • Lehman Aggregate (-2.60%)
  • MSCI EAFE (-2.26%)
  • S&P 500 (-1.57%)
  • Dow Jones (-1.14%).

More information and Hewitt’s data can be found at  http://was4.hewitt.com/hewitt/services/401k/observ/04_april.htm .