The Markets January 15, 2009

2008 a Year of Records for Hewitt 401(k) Index

As a reaction to the plunging stock market, the overall transfer activity in the Hewitt 401(k) Index was significantly higher in 2008 than in previous years.
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Throughout the year, 5.7% of balances were transferred, which is the highest level since the inception of the index in 1997. On average, Hewitt said, only 3.3% of balances are transferred annually.

Another historical record set by the transfer activities in 2008, according to Hewitt, was the amount of equity transfers. A total of $6.3 billion was moved out of equity investments during 2008, more than twice the second highest annual equity outflow ($2.9 billion in 2002). In addition, 11 out of 12 months in 2008 experienced equity outflows—the highest of which occurred in January and September.

Because of both transfers and market returns, participants’ overall equity allocation decreased by 14%, from 66.9% at the end of 2007 to a historical low level of 52.9% at the end of 2008. It is the largest decline during a one-year period, since the beginning of the 401(k) index.

The Flight from Equity

International funds were the biggest losers in 2008, with $1.9 billion shifting out of this asset class. That reversed the trend of inflows into these funds seen from 2003 to 2007, where more than $4.2 billion flowed into this asset class. As a result of poor market performance and significant outflows in 2008, the asset allocation in international funds dropped for the first time in several years, from 9.8% at the end of 2007 to 6.1% at the end of 2008.

Large U.S. equities experienced the second largest outflow of $1.7 billion in 2008. It was also the largest annual outflow for this asset class since the beginning of the index. The holdings in this asset class declined by nearly 5% to 15.7% by the end of the year.

Balanced funds lost approximately $1 billion in transfers, and lifestyle funds saw $529 million in outflows. Similar to international funds, 2008 reversed the trend of inflows to lifestyle funds between 2003 and 2007, when $1.6 billion moved into this asset class.

As expected, the three fixed-income asset classes received the largest inflows. GIC/Stable value funds saw $5.3 billion in inflows during 2008—the largest inflows ever into this asset class. As a result, the holdings in this asset class went up more than 11.6% to 32.3% by the end of 2008. Bond funds received $1.2 billion in inflows in 2008, followed by money market funds with $459 million.

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Modest 401(k) Transfer Activity in December

For the month of December 2008, transfer activities were very modest, according to Hewitt. Only 0.04% of balances were transferred on a net daily basis, and the direction of the monthly transfers was slightly equity-oriented. However, $187 million moved out of equity investments during the month.

More than half of monthly inflows (51.74%) went to GIC/stable value funds, while bond funds received 42.97% of monthly inflows, according to Hewitt data. Company stock funds experienced the biggest outflows (33.58%), followed by lifestyle/pre-mix funds (15.57%) and balanced funds (14.53%).

Almost a quarter of participant-only contributions for the month went into GIC/Stable Value investments (24.04%). Lifestyle/pre-mix funds took in 21.65% of participant contributions and large U.S. equity received 16.68% in December.

As of the end of the month, GIC/stable value funds held the largest share of participant balances (32.28%), followed by large U.S. equity (15.7%) and company stock funds (14.8%).

The Hewitt 401(k) Index Observations is available here.

Data & Research January 15, 2009

Third-Party Distribution on the Rise

Third-party distribution has gained share in both the retail and institutional marketplace since 2002—a trend Cerulli expects to continue.
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According to a new Cerulli report, in the institutional market, third-party distribution accounted for just 33% of all institutional assets in 2007. However, since 2002 the segment has more than doubled, according to a release about the research. Cerulli pointed to the growing use of third-parties in less traditional institutional markets such as the defined contribution (DC) space. Overall, the growing prominence of third-parties, such as investment consultants, is set to become “an enduring feature of the institutional asset management landscape.”

“The rise of the intermediated institutional sale in recent years has had a tremendous impact on institutional managers, who find themselves dealing with consultants on an increasing basis,” said Billy Hayes, associate director and co-author of the report, in the release.

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Private defined benefit is cited as the leading source of new assets in the institutional market. “Unlike retail asset managers, institutional asset managers expect future sources of flows to be roughly similar to past sources,” Hayes said. “Institutional managers generally have enduring legacies in the DB market and still expect future flows to be significant.’”Hayes noted that the emergence of the DC plan as a primary retirement savings vehicle has caught some asset managers off guard as retail firms with experience addressing individual investors have built out highly profitable DC businesses. As a result, he said, more than half of institutional managers said they expect future sales to come through private DC.

In the retail market, the third-party channel accounted for 57.6% of all retail client assets in 2007, and over the previous five years this distribution model gained 10%.

“One clear driver of this trend is the growth of alternative distribution outlets for mutual funds such as mutual fund advisory programs, which are predominantly distributed through unaffiliated third-party advisers,” said Jake Hartnett, analyst and co-author of the report. “However, open architecture has also contributed to the growth as assets have to shifted away from the proprietary channel.”

More than half (57%) of retail asset managers expect third-party distribution to continue to be the foremost sources of new assets—including broker/dealers, registered investment advisers (RIAs), and other third-party platforms, according to Cerulli.

The study is Cerulli Quantitative Update: The State of U.S. Retail and Institutional Asset Management 2008.

 

 

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