October Markets Move Participants

November 11, 2002 (PLANSPONSOR.com) October was a good month for US stock markets, and that appears to have spurred participants to shake off their trading lethargy, according to the Hewitt 401(k) Index.

Indeed, of the 23 trading days, there were 4 high and 6 moderate volume days, according to the index which tracks the movements of some 1.5 million participants.   However, participants who transferred funds demonstrated no clear tendency toward either equity or fixed income investments on those days.  

Above Average

Net transfer activity itself was above average for the month, with 0.11% of balances being transferred on average, and most above-average transfer days occurred when the market was rising.  In September, transfer activity averaged just 0.08% of participant balances (see Stable Value Options Top September Allocations in Hewitt Index ).    

Overall, while transfer activity was directed towards fixed income investments on 12 of the trading days, October actually had the lowest percentage of fixed-income-oriented days since March (which was the second best month of the year for the S&P), according to Hewitt.    

Poor Timing?

Clearly the vast majority of participants are not transferring accounts on any given day.   Still, those that are seem not to be timing their movements very well.   For example, one of the higher trading volume days in October was October 1.   On that day, stocks surged, with the Dow enjoying its eighth biggest one-day point gain ever, as it rose 4.6% and the S&P 500 recorded a 4% increase.  

However, on that same day, participant trading volumes were more than double what Hewitt considers “normal” for its index – and, on a net basis, participants moved toward stocks.   Since the vast majority of 401(k) daily trading programs effect participant instructions at the day’s closing net asset value (NAV), participants who tried to ride up with the market may instead have wound up buying “high.”

Sell Low

The very next day, stocks tumbled back.   The Dow lost 2.3%, while the S&P 500 shed a comparable 2.2%.   Participant trading volume recorded by the index was 2.5 times the normal level and, on a net basis, favored bonds – a combination that suggests participants were selling stocks at a relative low point.

Interestingly enough, the vast majority of net equity transfers on October 1 were to international (81%) and emerging markets (17%) offerings, primarily drawn from GIC/Stable Value and company stock and money markets.   The October 2 transfers reversed that course – with more than two-thirds (69%) of the transfers coming from international funds, and another 14% from emerging markets.   However, the data does not show how many participants comprised that activity – only that it amounted to about 0.16% of the total balances in the index.

Stock Shift

However, all in all, rising stock prices boosted the level of participant equity allocations, to 58.4% of balances from a record low of 57.2% of balances at the end of September, according to Hewitt.   However, stocks represented more than two-thirds of the total balances at the beginning of the year, and nearly three-fourths of the total in late 2000.

Yet when the dust settled, GIC/Stable Value remained the top single asset class, representing nearly 27.5% of the total.   Company stock gained ground, making up about 25%, while large US equity was the third largest segment, nearly 18%.   Balanced options made up nearly 10% of the total, while bond funds held 5.11%, and lifestyle funds made up about 4% of the total.

However, looking at new contributions, the picture is more even.   Large US equity funds continue to lead, representing more than 22% of the monthly contributions, with 21.5% directed toward GIC/Stable Value, and 19.4% going to company stock.   Lifestyle, bond, and balanced funds drew about 7.5% each. 

October outflows from stock investments were more reserved – just $35 million was transferred from large US equity during the month, for example – a category that suffered a $200 million outflow in September, according to Hewitt.   Still, for the year, more than $1 billion has been pulled from large US equity funds – and some $1.5 billion has shifted toward GIC/stable value options.