Data & Research January 19, 2010

Participants Go With the Flow in 2009

Participants who were inclined to rebalance their accounts in 2009 tended to follow the market, according to a new report.
Reported by

According to the Hewitt 401(k) index, $930 million in assets have moved from fixed-income investments to equities since the stock market rally began in April—activity that has nearly offset the transfers out of equities ($1 billion) experienced during the first quarter of the year, when the markets were down significantly.     

A Way to Go   

That said, looking back a bit further to encompass the severe market losses in 2008, Hewitt notes that equity outflows during the market declines have dramatically outpaced inflows since the rebound. Nearly 6% of total 401(k) assets ($7.3 billion) were moved out of equities into fixed-income investments between January 2008 and March 2009. By comparison, only 1% has shifted in with the rebound thus far.  

During the first quarter of 2009, nearly all equity asset classes had significant outflows, though large U.S. equity took the largest hit, with $284 million transferring out during the quarter.  International, balanced, and lifestyle funds also experienced significant outflows—each had more than $200 million shift out during Q1.  As for where that money went, GIC/stable value funds received nearly all of the transfers (gaining more than $1 billion), according to Hewitt.    

‘Turning’ Tables     

Since the markets turned in April, GIC/stable value funds have experienced the largest losses—more than $1.5 million transferred out, according to the Hewitt 401(k) Index.  Money-market funds lost $266 million in net transfers, while lifestyle funds received the largest inflows of $823 million. International funds received $539 million of inflows, followed by bond and small U.S. equity.

Cumulatively during the year, lifestyle, bond, and international asset classes all received what Hewitt described as “significant” inflows. By the end of 2009, the average allocation to lifestyle funds in the Hewitt 401(k) Index reached a record high (for that Index) of 11.1%, up 2.1% from the end of 2008 due to a variety of factors (market returns, new contributions, and participant transfers). Participant allocations to international funds also increased 1.2% to 7.3% at year-end, but still below the historical high of 10% achieved in October 2007.    

Big Losers

GIC stable value funds and company stock experienced the largest outflows during 2009. Stable value, which held 36.7% of assets in the Hewitt 401(k) Index in February of 2009, slipped to 26.6% at year-end. Company stock lost $919 million in transfers during the year, and just 14% of assets were in company stock at the end of 2009 (albeit company stock holdings in a variety of companies).

On average, 0.039% of balances transferred on a net daily basis during 2009, which is significantly lower than that of 2008 (0.056%). Further, only 19 days during 2009 had what Hewitt characterized as “above normal levels” of transfers1, about a third of the 2008 pace (51 days).     

December Movements     

Transferring participants favored equity over fixed income investments on nearly two-thirds (64%) of the days in December, continuing the trend that began in April 2009, according to the Hewitt 401(k) Index.      

Participants' total equity allocation ended the year at 58.1%, up 5.2% from the end of 2008, mainly due to strong stock market returns. However, this allocation remains significantly lower than the highs prior to the market decline (69.2% in May 2007).  Employee equity contributions increased 2.2% from 57.4% at the end of 2008 to 59.6% at the end of 2009. 

For the month of December, lifestyle/pre-mix funds proved to be the most popular destination for contributions, attracting nearly one in every four dollars (24.1%).  GIC/stable value drew 18.65% of the month’s contributions, while large U.S. equity funds garnered 15.72%.  Another big loser in 2009—company stock—pulled 12.13% of the month’s contributions, while international offerings got 8.14%, and bond funds 6.30%.  Those overall trends were mirrored in the direction of participant-only contributions for the month, with lifestyle/pre-mix, GIC/stable value, large US equity, and international leading the pack.

(1) 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. A "moderate" relative transfer activity day is when the net daily movement is between 1.5 and two times the average daily net activity of the preceding 12 months.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

Products January 19, 2010

‘Risk Efficient’ Index Series Debuts

Index provider FTSE Group and the EDHEC-Risk Institute have launched a new set of “risk efficient” indexes.
Reported by

According to a press release, the FTSE EDHEC-Risk Efficient Indices are an index series that uses a risk-adjusted investment strategy to that of traditional market capitalization-weighted indices, to deliver investors with an optimal risk-return ratio.       

The FTSE EDHEC-Risk Efficient Index Series, a global offering, can be used by asset owners and investment consultants to capture equity market returns with improved risk/reward efficiency, according to the release. The efficiency is achieved by maximizing the Sharpe ratio, by weighting the constituents of the indexes accordingly. According to the company, the enhanced methodology, combined with a constituent base deriving from the FTSE All World Index Series, “allows investors to utilize a new passive investment strategy, an area that is consistently growing amidst the global recovery.”    

The indexes serve a different purpose to traditional market capitalization-weighted indexes, which are created to track the performance of the market, using an advanced methodology to achieve efficient risk to return, according to the release.

Professor Noël Amenc, director of EDHEC-Risk Institute, said: “Overall, traditional commercial capitalization-weighted indices are not designed to be at the pinnacle of efficiency or provide well-diversified portfolios, as they principally track the market. EDHEC-Risk Institute has therefore undertaken major research in a methodology that minimizes excessive concentration of risk and affords investors the ability to benefit from the maximum Sharpe ratio portfolio. This simple concept is primarily based on the concept of a positive and robust long-term relationship between the risk of a stock and its return and we are pleased to have partnered with FTSE Group, an authority in the field of indexing, to achieve this within an innovative index series.”       

Mark Makepeace, chief executive at FTSE Group, said in announcing the launch: “Increasingly, investors are looking to diversify their core passive funds across a range of benchmarks weighted by market cap and other weighting schemes. The weighting methodology developed by the EDHEC-Risk Institute provides a robust and transparent approach to constructing a benchmark seeking to achieve an efficient risk return.”

«