Participants Transferring More – to Little Effect

October 25, 2004 ( - Participants appear to be on track for a record year of fund exchanges - but the net effect of those fund flows appears to be nil, according to new research.

According to  Vanguard’s Participant Report Card for June 2004,  eleven percent of participants made a transfer during the first half of this year, putting it on track to surpass the peak seen in 2000.   However, Vanguard notes that in dollar terms, trading activity remains at cyclical lows, and that during the first six months, nearly as many participant dollars are shifting into the stock market as are leaving it.   During this period, participant trading volumes totaled 8.1% of Vanguard recordkeeping assets, significantly less than the “high churn” year of 2000, when transfers totaled nearly a third of average recordkeeping assets.   Nonetheless, the study notes that while, on a dollar basis, there was a very slight movement to equities during the first six months of this year, the shift “accounted for zero percent of average monthly recordkeeping assets.”

The Vanguard report of participant activity within defined contribution programs administered by the mutual fund powerhouse continues to find that the current state of the stock market has at least a modest influence on participant investment decisions.   During the first half of 2004, newly enrolling participants invested just 66% of their ongoing contributions in equities, compared with 75% of those who enrolled in 2000.   Among all participants, 71% of contributions went to equities during the first six months of 2004, but participants who enrolled in 2002 (near the bottom of the bear market) directed 63% of their 2004 contributions to equities.     

Earlier this year study authors Stephen Utkus and Jean Young noted “…the impact of past performance as a heuristic for those making an active choice in a retirement savings plan – namely new enrollees,” going on to clarify that a heuristic is a rule of thumb or shortcut devised to simplify decisionmaking (see  Past Performance Pulling Participant Allocations: Vanguard ).

Average Allocations

All in all, as of June 30, 2004, the average plan participant asset allocation was 70% equities and 30% fixed income, down from the peak of 77% in equities at the end of 2000.   The study’s authors estimate that about two-thirds of this reduction occurred as a result of trading from equities to fixed income during the bear market, with the rest a result of redirected contributions.

During the first six months of 2004, median participant balances administered by Vanguard rose 3% to $21,745.   The report goes on to note that since the end of 1999, the median participant account balance is up 38%.   However, average balances, which Vanguard notes are more reflective of older, more affluent, or longer-tenured participants, grew 4% to $60,400.   That balance is “typical” of a participant in the top 30% of all account holders, according to the report.   Vanguard noted that, through June 2004, the median five-year participant return was 2.7%, while the median one-year return was 16.3%.