Rising Markets, Temps Tempt Transfers

August 7, 2003 (PLANSPONSOR.com) - Participant transfer activity rose along with rising temperatures (and equity markets) in July, but remained muted relative to historical trends.

There were no above normal volume trading days last month (there has only been one of those since the beginning of April – June 3, see  June Transfers Favor Equity Investments – But Not Company Stock ), but daily volumes were higher than in prior months.   Still, just 0.07% of account balances, on average, moved during the month, well within the norms tracked by the Hewitt 401(k) Index.   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.

Stock “Tracking”

Transfers favored moves to equity investments on a net basis on 13 of the 22 trading days during the month in the Hewitt Index, which tracks the movements of some 1.5 million participants, movements in sharp contrast to participant activity in July 2002.   Transfer activity in the Hewitt 401(k) Index was above average, and reflected participant shifts to fixed income investments on more than three-quarters of the days during that month (see  Transfers Heat Up While Markets Melt Down in July ).  

Not that there aren’t emerging signs of “life” in transfer activity patterns.   When the NASDAQ shot up 3.44% this past July 7, 401(k) participants responded with the highest transfer activity level of the month, as 0.12% of balances moved primarily toward equity investments, according to Hewitt.   The second largest transfer day (.010% of balances transferred) came on July 25, as the Dow Jones Industrial Average enjoyed its best day of the month, rising nearly 2%.   Participants shifting to equities as the stock market rises may, or course, be buying “high.”   The day following the July 25 shift, a nearly identical 0.10% of participant balances shifted back to fixed income investments from equities on a net basis.

The NASDAQ set a blistering pace in July, rising 6.91% and recording its sixth monthly gain in a row (it hasn’t seen a streak that long since September 1995). The Russell 2000 was nearly as hot, rising 6.20%, while the Wilshire 5000 was 2.28% higher, the Dow was up 2.76%, and the S&P 500 rose 1.62%. It was the fifth straight monthly gain for the latter two indices – an accomplishment last enjoyed in the five months ended January 1999.

Along with the recent surge in equity markets, Hewitt notes that since April more than $1 billion (on total plan balances now topping $80 billion) has moved out of GIC/stable value and bond funds.   In July bond funds were the big loser, comprising more than 55.5% of the net transfers out, compared with nearly 25% in June (see  June Transfers Favor Equity Investments - But Not Company Stock ).   As was the case in June, money continued to flee company stock investments in July.   In fact, more than 44% of July's net transfers out came from company stock.   In July those transfers went to a variety of investments, notably small US equity (32%), large US equity (18%), and GIC/Stable Value (nearly 11%).   A month earlier, GIC/Stable Value funds had been responsible for nearly half of the total net outflows.

Despite those shifts, GIC/Stable Value continued to lead asset allocation categories in the Hewitt Index, representing more than 25% of the total.   Company stock continued to close the gap, however, and made up nearly 25% of participant balances tracked by the index, followed by large US equity (21%), balanced (7%), lifestyle (4.75%), bond (4.45%), and money market (3.19%).

At the same time, contributions to equity investments in 2003 continue to remain lower than in prior years. Year to date, the average daily allocation to stock investments as a percent of total contributions stands at 62%, compared to a high of 77% in 2000, according to Hewitt.   In July large US equity drew 24.25% of total contributions, while GIC/Stable Value pulled nearly 23%, and company stock attracted about 17.5%.   Other contribution draws were:

  • 7.52% - lifestyle/pre-mixed
  • 7.28% - bond
  • 4.84% - small US equity
  • 4.69% - balanced
  • 3.64% - money market
  • 3.47% - international equity
  • 2.75% - mid US equity

The combination of market strength and transfers toward stock investments has taken the stock allocation of the Index to some 62% of total balances as of the end of July, the highest level in a year (though still well short of the 2000 high of 74%).