The Markets October 16, 2012

Caution Still Prevails for 401(k) Participants

 

The Aon Hewitt 401(k) Index pointed to continued participant uncertainty in September as daily transfer volumes remained significantly low compared with historical levels.


 

 

Reported by

 

Investors were encouraged by 30 consecutive months of job growth, modest growth in gross domestic product (GDP), the Federal Reserve announcement of QE3 and positive corporate earnings reported. However, with uncertainty around the European debt crisis, high unemployment and the fact that fewer companies beat revenue expectations this year (lowest level since 2009), most participants elected to maintain their current holdings. On average, only 0.023% of balances transferred on a net daily basis, which is similar to the volume of transfers over the past three months.  

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Among defined contribution plan participants who transferred monies, most transferred from equities into fixed-income investments in September—a trend that also describes the entire third quarter. Nearly three-quarters (74%) of the days in September favored transfer activities into fixed-income funds, representing $237 million in total flows or 0.2% of total assets. However, when company stock activity is excluded, equity outflows account for just $46 million (0.03%) of participant balances.  

For September outflows, company stock funds lost $191 million (67%), small U.S. equity funds lost $27 million (10%) and large U.S. equity funds lost $27 million (10%). Similarly, the majority of movement during the third quarter was out of company stock funds. For the quarter, $750 million transferred out of equities, however, company stock accounts for well over half ($472 million) of this activity. The next largest outflows were from the small U.S. asset classes, which lost $154 million (18%) for the quarter.


 

 

(Cont’d…)

All fixed-income asset classes recorded net inflows in September. Similar to August, GIC/stable value funds received the most inflows with $134 million (47%), while bond funds took in $63 million (22%) and money market funds received $23 million (8%). The premixed asset class also had $25 million (9%) of inflows. In the third quarter, both GIC/stable value and bond asset classes took in 36% of the inflows—about $305 million each. Together money market and premixed assets classes accounted for the next 20%. Specialty sector funds also received a noteworthy $46 million (5%) of inflows, which is much higher than usual for this asset class.  

In total, 62.1% of employee discretionary contributions were directed to equities for September, which is unchanged from August. For the quarter, an identical 62.1% of employee contributions into the plan were in equities compared to 61.6% during the second quarter, on average.  

Participants’ overall equity allocation ticked upward hitting 60% by the end of September, compared to 59.5% at the end of August. The third quarter began with 59.3% of participant investments allocated to equities.  

More information is here.

 

Data & Research October 16, 2012

Plan Sponsors Not Making Best Use of TDFs

 

While more than half of plan sponsors offer target-date funds (TDFs) in defined contribution (DC) plans, only half of them use TDFs as the default.


 

 

Reported by

 

The 3rd biannual survey of plan sponsors by AllianceBernstein found many plan sponsors offering TDFs are underutilizing qualified default investment alternatives (QDIAs), which provide safe harbor protection for sponsors and often offer better asset allocation for participants than they might have if they constructed their allocation on their own. Of the 50% of sponsors offering a TDF but not using it as the default, 83% have no default or are still using a stable value fund, an equity fund or a bond fund—none of which are QDIAs—as the default.

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The survey also found the majority of midsize and large-plan sponsors are failing to leverage their assets to provide more specialized or customized TDFs.

  • 22% of large-plan sponsors ($250 million or more in assets) and 21% of midsize plan sponsors ($1 million to $249 million in assets) reported that they have adopted customized TDFs; and
  • 36% of large-plan sponsors said they have not adopted customized TDFs because they were unaware of the benefits of improved structure.

“Even in the wake of a continuing decline of Social Security and defined benefit plans as primary sources for retirement income, our recent research shows that many plan sponsors are still struggling to find the best way to structure their DC plans,” said Joe Healy, head of AllianceBernstein’s Defined Contribution Client Experience. “While more and more sponsors recognize the benefits of offering an age-based, asset-allocation investment solution to their participants, they fail to realize valuable fiduciary protections by not designating these funds as their plan’s default.”


 

 

(Cont’d…)

According to the survey, the size of plan assets directly impacts sponsors’ goals for TDFs. More than half (54%) of sponsors of large plans and 43% of sponsors of midsize plans said the goal of their TDF is to ensure that savings last through participants’ retirement years—versus only 32% of sponsors of small plans (those with less than $1 million in assets). Less than half (41%) of small-plan sponsors said the goal of their TDF is to ensure a minimum acceptable level of savings at retirement.

More than one-third (37%) of midsize-plan sponsors were concerned about improving participation, while only 28% of sponsors of small- or $500 million-plus large plans were concerned. Small plans have the lowest participation rates (30% or less) while large plans have the highest participation rates (86% or higher).

AllianceBernstein’s plan sponsor survey was conducted online in November 2011 and included 1,018 respondents nationwide, representing small plans (with assets of less than $1 million), midsize plans ($1 million to $249 million) and large plans ($250 million or more).

The full report of the findings is here.

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