Participant Funds Continue to Flock to Overseas Offerings

January 9, 2006 ( - Participant trading volumes remained modest and relatively balanced as 2005 wound to a close, but 401(k) investors continued to demonstrate an affinity for international offerings.

According to the Hewitt 401(k) Index, net transfers favored fixed-income offerings on 57% of the days in December, mirroring a trend in evidence throughout the year.   Hewitt notes that more than $750 million transferred into GIC/stable value funds on a net basis during the year.

The under-reported story, however, is the appetite of the transferring participants tracked by the index for international and emerging market equity funds. Together, these two asset classes realized nearly $1 billion in net inflows in 2005, building on 2004 inflows of more than $725 million, and net inflows in 2003 of nearly $500 million, according to Hewitt.   In December, International funds were responsible for nearly half (47.41%) of the inflows, while flows to emerging market funds accounted for nearly 16%, behind GIC/stable value, which drew nearly 26%.

Proportionate Shifts

Despite those shifts, the asset class does not yet represent a disproportionately high percentage of participant holdings, at least not on an aggregate basis.   Hewitt notes that International and emerging markets equity make up only 6.3% of total plan balances and only 9.4% of equity balances as of the end of 2005.   At the end of the year, the proportion of participants’ total balances in stock investments stood at 67.1%, and held in a narrow range between 66% and 67% throughout the year.

Hewitt noted that 2005 saw average transfer activity of just 0.037% of balances shifting per day on a net basis, a reading that puts the volume of average daily net transfer activity at about 20% lower than in 2004 and nearly 50% lower than in 2003.   On the other hand, Hewitt cautioned that last year included more instances of “high” relative transfer activity than in the past couple of years — that is, days when transfer activity exceeded twice the trailing 12-month average.

In December, trading was normal on every day but December 8, when activity was actually low (just 0.01% of balances).   Company stock made up the lion’s share of asset class outflows, just over 62%.   Large US equities represented another 17%, while bonds made up 12.25%, and small US equities were nearly 8% of the total outflows.   Despite those shifts, at the end of the year, company stock led all asset classes in representation with 23%, followed closely by the 21.92% in GIC/Stable value and 21.43% in large US equities.   Balanced funds were 6.59% of the total, lifestyle offerings made up 6.17%, and International funds represented 5.24%.