Hewitt: K Plan Participants Roar Back To Equities in '03

January 9, 2004 (PLANSPSONSOR.com) - The past year represented not only the charging of the bulls in the broader markets, but also of investors back into equity investments in their 401(k) accounts.

Once the dust settled, 401(k) participants ended 2003 with over 65% of their 401(k) balances in stock fund investments.   Comparatively, as 2003 dawned, only 59% of participants’ balances were held in stock oriented funds, according to data from the Hewitt 401(K) Index, which tracks the movement of some 1.5 million participants.

This year saw investors easing back into the equity market like an old man into a warm bath.   On a majority of days in 2003 (55%), investors opted for equity investments over fixed income options.   In fact, 2003 saw $2.4 billion moving into diversified equity funds, which is a complete reversal of the mass exodus from equity to fixed income from the past few years.   By comparison, 2002 saw only 37% of the transfer days favored equity.

Most of this infatuation with equity was driven by the transfer activity as evidenced by a decline in equity oriented contribution levels.   On average, 63% of contributions were directed to stock funds, versus 68% in 2002.

For December though, transfers favored fixed income investments on 12 days, compared with equity for 10, as trading levels remained stagnant.  On average, daily net transfers totaled just over 0.06% of the roughly $70 billion in 401(k) balances tracked by Hewitt last month. 

December’s numbers correspond with a normal level of relative transfer activity – 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 – a theme that was present through the year. In 2003, 0.069% of balances transferred on a net basis, versus an overall daily Index average of 0.068%.   Transfer activity reached the “moderate” level – daily net movement between 1.5 and 2 times the average daily activity of the trailing 12 months – only a handful of times during the year, and never touched the “high” level – activity in excess of 2 times the average.

Stock Stuffers

If it is more common on days when the market rises for money to move into stock funds than into fixed-income funds, then December’s transfer activity is a bit of a head scratcher.    Historically, 401(k) participants have elected to follow the market when transferring money – moving into stock funds on positive market days and into fixed-income funds on negative market days. Yet in December, the market was up more days than it was down – by a count of 14 to 8 respectively – and participants elected more days to transfer funds to fixed income than equity investments.  

Hardest hit by the outpouring of participant funds was company stock, which accounted for 71.70% of the fund outflow, and Bond funds that compose 20.70% of the exiting participant dollars. Other investment outflows were noted in:

  • Small US Equity (-5.49%)
  • Money Markets (-1.35%)
  • Speciality/Sector (-0.75%).

However, one fund’s outflow is another ones gain.   Most participant inflows in December were concentrated in International funds (30.15%), followed by Large US Equity (28.88%). This is of little surprise when measured against the benchmarks.   The MSCI EAFE was up 7.81% for the month, trailed by a 7.02% return notched in the Dow Jones Industrial Average in December.

Also reporting gains were the S&P 500 (5.24%), the Nasdaq (2.20%), the Russell 2000 (2.03%) and the Lehman Aggregate (1.02%).   Meanwhile, other funds picking up 401(k) plan participant transfer dollars were Lifestyle/Pre-mix funds (14.52%), GIC/Stable Value (11.74%) and Balanced funds (7.91%).

At the close of December, and 2003, the majority of participant accounts were held in Company Stock (25.01%), followed by GIC/Stable Value (23.26%) and Large US Equity (21.90%).   Other holdings included:

  • lifestyle/premix (6.17%)
  • balanced (6.03%)
  • small US equity (4.11%)
  • bond (3.31%)
  • international (3.28%)
  • money market (2.74%)
  • mid US equity (2.50%)
  • self directed window (1.18%)
  • emerging markets (0.34%)
  • specialty/sector (0.16%).

New contributions painted a slightly different picture with GIC/stable value being the most prevalent investment option, comprising nearly a quarter (24.76%) of the total.  However, company stock was the third most prevalent holding, with 15.58%, while large US equities were 22.98% of the total, coming in as the second most widely held.  The rest of the contributions shook out as:

  • lifestyle/premixed (7.65%)
  • small US equity (6.67%)
  • balanced (5.35%)
  • bond (4.69%)
  • mid US equity (4.03%)
  • international (3.93%)
  • money market (2.58%)
  • emerging markets (0.83%)
  • self directed window (0.76%)
  • specialty/sector (0.18%).

More information and Hewitt's data can be found at   http://was4.hewitt.com/hewitt/services/401k/observ/03_december.htm.