Investing April 8, 2004

Hewitt: K Plan Participants Transfer To Bonds in March

April 8, 2004 (PLANSPONSOR.com) - As the equity markets swooned in March, 401(k) participants showed transfer activity toward fixed-income investment options.
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Fixed-income oriented transfers dominated on 70% of the days during the month, 16 days total, compared with transfer activity favoring equities on just seven of the trading days in the month.   This made March 2004 the most bearish month of transfers since early 2003.  On average, daily net transfers totaled just under 0.06% of the roughly $70 billion in 401(k) balances tracked by Hewitt Associates. 

By the end of March, market weakness and fixed-income oriented transfer activity resulted in a decline in the percentage of 401(k) participants’ overall allocations to equity investments – from 66.5% at the end of February to 65.9% at the end of March.

February’s numbers were light but still feed into a normal level of relative transfer activity – normal being defined 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.  During the month, only four days touched a level of moderate.

Fund Inflow

If it is more common on days when the market rises for money to move into stock funds than into fixed-income funds, then March’s transfer activity is a bit of an anomaly.   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 March, the market had 10 days in which the S&P 500 moved in a positive direction, but only seven days in which transfer activity favored equities.   Further, on one of those equity heavy transfer days – March 2 – the S&P 500 ended down 0.59%.  

Hardest hit by the outpouring of participant funds was company stock, which accounted for 57.56% of the fund outflow, and Large U.S. Equity that composed 31.86% of outflow.   Other investment outflows were noted in:

  • Lifestyle/Pre-mix (-4.40%)
  • Mid U.S. Equity (-1.72%)
  • Emerging Markets (-1.49%)
  • U.S. Small Equity (-1.48%).

However, one fund’s outflow is another one’s gain and in March it was funds with heavy fixed-income positions that reaped the inflows.   Most participant inflows in March were concentrated in GIC/Stable Value (50.50%), followed by Bond (28.33%).   Other inflows were scattered between money markets (15.12%), International (3.87%), Self-Directed Window (2.09%) and Specialty/Sector funds (0.09%).

Participant Allocations

As March drew to a close, the majority of participant funds were held in Company Stock (24.30%), followed by Large US Equity (22.03%) and GIC/Stable Value (22.43%).  Other holdings included:

  • lifestyle/premix (6.30%)
  • balanced (6.25%)
  • small U.S. equity (4.56%)
  • international (3.65%)
  • bond (3.39%)
  • mid U.S. equity (2.62%)
  • money market (2.56%)
  • self directed window (1.32%)
  • emerging markets (0.44%)
  • specialty/sector (0.15%).

New contributions were slightly different in March. Large U.S. Equity took in 25.43% of new participant funds, followed by 21.40% going into company stock and GIC/Stable Value with 14.67%.   The rest of the contributions shook out as:

  • lifestyle/pre-mix (7.14%)
  • small US equity (6.94%)
  • bond (5.18%)
  • international (5.17%)
  • money market (4.29%)
  • mid U.S. equity (4.05%)
  • balanced (3.52%)
  • self directed window (0.92%)
  • specialty/sector (0.67%)
  • emerging markets (0.63%).

The benchmarks were overall mixed in March.   Up were the Russell 2000 (0.93%), Lehman Aggregate (0.75%) and MSCI EAFE (0.56%).   Down were the S&P 500 (-1.51%), the Nasdaq (-1.75%) and the Dow Jones Industrial Average (2%).  

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

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