More Trading, Less Stocks For Participants in 2002: Hewitt

January 13, 2003 ( - December was a month of "Silent Nights" when it came to participant transfers, but over the course of the tumultuous year, participant trading volumes were higher than normal.

Participant transfer activity was lower than normal in December, with just 0.06% of participant balances trading on an average day during the month, according to the Hewitt 401(k) Index, which tracks the activity of some 1.5 million participants.

Still, overall 2002 saw above-average transfer activity, and movement away from equity investments. On average, 0.08% of balances transferred per day during the year, compared to average daily net transfer activity since the inception of the Index of 0.07%, according to Hewitt. Activity peaked in July at 0.11%, in the midst of slumping markets and burgeoning stock scandals (see  Transfers Heat Up While Markets Melt Down in July ).   That month saw a high volume of participant trading on a third of the trading days.  

Back to Normal

There were no “high” trading volumes in December, according to Hewitt.   In fact trading was at normal levels on 16 of the trading days, rising to moderate on just 3 days, and low on the remaining two days (one of those was the day after Christmas).   Trading volumes had also been subdued in November, despite a strong performance in the equity markets (see  Participants Unmoved by Market Recovery ) .

On a net basis, participants favored fixed income investments on 17 of the 21 trading days in December.   However, on two of the three moderately high trading days participants opted for stocks on a net basis.   On both of those days (12/10 and 12/16) trading participants in the Hewitt index followed the lead of US stock indices, which raced higher on a wave of bargain hunting.

However, for the month, nearly two-thirds (64.03%) went into GIC/Stable value options – and the remaining 35% went to bond investments.   Large US equity funded most of that shift (representing nearly 30% of the total), while company stock represented 21.4% of the outflows, and money market investments made up nearly 16.5%.   Balanced offerings were about 8.5% of the total, and 8.67% came from international offerings.

Contribution Flows

Looking at December contribution flows, large US equity drew 22.63%, while GIC/stable value pulled 21.49%, and company stock attracted 19.43% of the total monthly contributions of participants in the index.   Bond, balanced, and lifestyle offerings drew about 7% apiece, while other categories drew less than 5% each.

Still, when the month drew to a close, GIC/Stable value investments were still the most widely represented holding in the Hewitt 401(k) Index – roughly 27% of the total.   Company stock was close behind, making up a quarter of the total holdings, while large US equity comprised 18% of the total.   Other sectors were represented as follow:

  • 9.06% – balanced
  • 5.33% – bond
  • 4.39% – lifestyle/pre-mix
  • 3.39% – money market
  • 2.53% – international
  • 2.25% – small US equity
  • 1.94% – mid US equity
  • 0.35% – specialty/sector
  • 0.29% – self-directed brokerage window
  • 0.16% – emerging markets

Momentum Shifts

Hewitt notes that participants who transferred commonly engaged in momentum market timing – reacting to market declines by shifting to fixed income investments.   In most daily valued 401(k) accounts, a trade placed during the day is actually processed at the day’s closing price.   Participants who lunge toward equity markets on a day where stocks are rising quickly are likely to find themselves buying high – and perhaps selling low from the fixed income investment(s) they are exiting – and vice versa.

All in all, money transferred primarily from stock to fixed income investments on 63% of days during the year – compared to 58% in 2001, according to Hewitt (see  2001 Participant Activity Light Despite Market Tumult ).   By the end of the year, nearly $3 billion in participant balances flowed from equity investments to fixed income alternatives.     While 75% of new contributions went to stock investments in 2001, just 68.4% did last year.  

A “normal” level of relative transfer activity is 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.