Caution Still Prevails for 401(k) Participants

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.  

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.  

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