Hewitt: K Plan Participants Flood Into Fixed-Income in May

June 8, 2004 (PLANSPONSOR.com) - The Dow Jones swooned in May and with the dip, 401(k) participants transferred more of their retirement funds into fixed-income investments, but overall the markets ended May in the black, leaving K plan trackers again scratching their heads at participant behavior.

At first glance, investors appeared to have come to their senses, returning to more rational participant behavior model in May.   For the month, 401(k) participants favored debt instruments 80% of the days in a month that saw the Dow Jones Industrial Average dip below 10,000 for the first time since 2003 , according to data aggregated for Hewitt Associates 401(k) Index.   This was particularly welcome after April’s unexplainable behavior when investors poured money into equity investments in 71% of the days even though the S&P 500 was only positive for 11 days in the month (See  401(k) Participants Rush Back To Equities ).

The rationale was not absolute though.   Despite the dip in the Dow in May, the month was positive overall for equity investors.   The S&P 500 saw 12 positive days and eight down days and ended the month up 1.37%.   Yet even with a market that was in the black, 401(k) transfer activity was fixed-income oriented on 80% of the days during the month.   Even the days when transfer activity favored equity investments did not shake out as market theory would suggest.   On May 7, 401(k) investors transferred money into equities, even though the S&P was down 1.37%, its worst day of the month.   Further, on the S&P’s best day in the month, May 25, investors transferred more money into bond options.

Hewitt, though, put a lot of weight in the Dow’s May 10 th slide below “the psychologically important 10,000 mark.”   Not only did K plan participants move assets into fixed-income investments on that day, but they did so on a grand scale, with 0.17% of plan balances transferred on a net basis, the only day that saw a high level of transfer activity for the month.   This compares to the historical average daily net transfer activity levels of 0.07% of balances.

Despite a few spikes, transfer activity in May was light with average daily net transfers totaling just under 0.057% of the roughly $70 billion in 401(k) balances tracked by Hewitt.  

Examining monthly transfer/cash flow data for the month on the whole, Hewitt found nearly all inflows going into GIC/Stable Value funds (74.59%), with only money market investments picking up any other inflows (25.41%).   Therefore, the other 11 investment sectors saw outflows for the months, led by Large U.S. Equity (-30.88%), Small U.S. Equity (-23.04%) and Lifestyle/Pre-mix funds (-9.44%).

Participant Allocations

As May drew to a close, the majority of participant funds were held in Company Stock (24.23%), followed by GIC/Stable Value (23.23%) and Large U.S. Equity (21.99%).  Other holdings included:

  • lifestyle/premix (6.17%)
  • balanced (6.14%)
  • small U.S. equity (4.44%)
  • international (3.59%)
  • bond (3.07%)
  • money market (2.68%)
  • mid U.S. equity (2.61%)
  • self-directed window (1.32%)
  • emerging markets (0.38%)
  • specialty/sector (0.15%).

New contributions in May did not follow transfer activity patterns, as the majority of contributions went toward Large U.S. Equity funds (24.39%).   After large equity offerings, Company stock (20.43%) and GIC/Stable Value (18.07%) made up the lion’s share of contributions. The rest of the contributions shook out as:

  • lifestyle/pre-mix (7.86%)
  • small U.S. equity (6.97%)
  • bond (4.81%)
  • international (4.69%)
  • balanced (4.34%)
  • mid U.S. equity (3.52%)
  • money market (2.71%)
  • self-directed window (1.31%)
  • emerging markets (0.68%)
  • specialty/sector (0.22%).

The benchmarks were a mixed bag in May. On the downside were the Lehman Aggregate (-0.40%) and the Dow Jones Industrial Average (-0.14%).   However, the rest of the indexes managed gains for the month:

  • NASDAQ (3.47%)
  • Russell 2000 (1.59%)
  • S&P 500 (1.37%)
  • MSCI EAFE (0.34%).

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