Transfers Heat Up While Markets Melt Down in July

Hewitt tracks the activity of some 1.5 billion participants – and found that July activity was relatively active, and largely moving away from stocks.

Participant transfer activity was “high” on a third of the trading days in July, a far different picture than a year ago when there were no high trading days (see Participants Make Fixed Income Shift in July ).  Last July, while transfers also tended toward fixed income investments, only 0.05% of participant balances were in play.  Last month on average, 0.11% of participant balances transferred – the most active month of 2002, according to Hewitt. 

In fact, July 2002 contained the greatest number of above-average transfer activity days in more than two years.

“In” Activity?

Hewitt notes that 401(k) plan participants tend to be inactive investors. In July, participants also demonstrated a tendency to sell equity funds on days when the stock market slumped – a trend that suggests participants still fail to understand the trading mechanics of mutual funds in 401(k) accounts.  In those 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.

When the dust settled, participants favored equity investments on just 5 of the 21 trading days during the month – and three of those days were consecutive (July 26 – July 30).

Stock Slump

The combined impact of the market decline and participants’ failure to rebalance (e.g., move monies from better-performing fixed income to lesser-performing equity asset classes) left the overall participant allocation to stocks at the lowest level since Hewitt began tracking activity in August 1997. Just 62.3% of total balances were invested in stocks by month end.

However, company stock continued to dominate the holdings, representing more than 27% of the total.  GIC/Stable value represented nearly 25%, however, while large US equity was responsible for slightly more than 20%.  Balanced funds at 7.14%, bond funds at 4.8%, and lifestyle funds’ at 4.40% were the other major categories (money market funds held 3.23%).

Contribution allocations (which include both participant and company contributions) were much less equity-oriented than usual in July.  While in an average month, 74% of contributions tend toward stock investments, this past month only 66% headed in that direction.

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. A “high” relative transfer activity day is when the net daily movement exceeds two times the average daily net activity.