The Markets May 13, 2009

DC Plans Saw Widespread Equity Losses in Q109

Mercer’s first-quarter 2009 Defined Contribution Universe Summary found losses in all equity markets during the period.
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A Mercer news release said the balanced asset class, using a benchmark of 60% S&P 500/40% Barclays Capital Aggregate Bond Indices, posted a 6.5%-loss. International equity markets, as measured by the MSCI EAFE Index, lost 13.9% during the period.

Mercer data showed the international equity asset class underperformed U.S. equities for the quarter by 290 basis points. Global equities lost 11.9% for the quarter and outperformed international equities by 200 basis points.

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According to Mercer, growth funds outperformed value funds during the first quarter, as the median large cap growth fund posted a loss of 4.7% compared to a loss of 12.9% for the median large cap value fund. The small-cap segment of the market trended in the same direction as large-cap stocks, as the median small-cap growth fund outperformed the median small cap value fund by 710 basis points.

The median large-cap fund outperformed the S&P 500 Index by 120 basis points for the first quarter. Small-cap funds underperformed their large-cap counterparts for the quarter, as the median small cap fund lost 12.9% for the quarter versus a loss of 9.8% for the median large-cap fund.

Within the international equity asset class, the median manager outperformed the MSCI EAFE Index by 130 basis points during the quarter. The median emerging markets manager lost 1.4% for the quarter and underperformed the MSCI Emerging Markets Free Index by 240 basis points, according to the Mercer data.

The median core fixed-income fund outperformed the Barclays Capital Aggregate Bond Index for the first quarter by 30 basis points. Mercer said the S&P 500 Index lost 11% during the quarter while the fixed-income asset class was flat for the quarter, with the Barclays Capital Aggregate Bond Index posting a 0.1% gain. Money-market instruments had a zero return, as measured by the three-month T-bill rate.

According to the report, capital market returns remained negative over the long term as losses during the first quarter of 2009 affected results. Over a 10-year time frame, the S&P 500 Index lost 3%, while the Russell 2000 Index gained 1.9%.

The report is available here.


Data & Research May 13, 2009

Participants Still Kept on in Face of Recession

Even in the face of a major economic downturn, 401(k) participants still kept on keeping on in 2008, according to a Hewitt Associates study.
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But that doesn’t mean participants have blithely let the economy’s slide go by without any reaction; Hewitt said employee investments in equity fund allocations were at record lows last year.

A Hewitt news release about its annual Universe Benchmarks study, which examines the saving and investment behaviors of more than 2.7 million employees eligible for 401(k) plans, showed that the median rate of return during 2008 was -28.3%. The average 401(k) balance dropped from $79,600 in 2007 to $57,200 at the end of 2008, while 43% lost 30% or more of their savings. Only 11% of employees were able to break even or see a gain in their 401(k) portfolios.

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Despite these losses, workers continued to save. Hewitt’s research shows that 74% of employees participated in their 401(k) plan in 2008 with the average deferral rate dropping only marginally, from 7.7% in 2007 to 7.4 % in 2008.

Saving More?

In fact, Hewitt said, more employees increased their savings rate last year (15.4%) than decreased it (14.9 %). Just 4.8% pulled their purse strings tight and stopped contributing to their 401(k) plan altogether in 2008.

“Whether it’s faith in the 401(k) system, inertia, or both, most employees continued to save for retirement amid the tightening economy,” said Pamela Hess, director of retirement research at Hewitt Associates, in the release. “But, because the losses workers have sustained are so extraordinary, they’ll need to be much more proactive about saving to build their nest egg back up to pre-recession levels. Now, more than ever, workers should make sure they’re investing in the right mix of funds, rebalancing periodically and getting financial help and advice to make sure they’re taking all the right steps to meet their long-term goals.”

Hewitt’s study showed a slight increase in the number of workers who made any trade in their 401(k) plan last year: 19.6% in 2008 versus 18.7% in 2007.

The volume of money they transferred was much higher. Nine of the 10 most active trading days were the days after a large downturn in the market, or days with an average return of -4%. Employees’ average equity exposure dropped to just 59% in 2008—which is an all-time low since Hewitt began tracking it in 1997. Stable-value funds experienced an 11% increase in asset allocation in 2008.

The Hewitt data also found:

  • Eighteen percent of employees took a hardship withdrawal from their 401(k) plan in 2008.
  • The number of employees taking out 401(k) loans (23.1%) in 2008 remained similar to levels in prior years.
  • Half of participants now invest in pre-mixed funds, up from 40% in 2005. Younger workers are much more likely to use them: 64% of 20- to 29-year-olds invested in these funds, compared to just 43% of workers in their 50s and 39% of those ages 60 or older.
  • On average, the allocation to company stock among workers who have access to these funds ended the year at 14.9%, down 7.4% from the previous year. Further, only 9% of employees held half or more of their 401(k) plan assets in their employer’s stock, down from 16% in 2007 and 27% in 2004.
  • The number of employees holding just one or two asset classes in their 401(k) plans decreased to 24% in 2008 from 29% in 2005 and 34% in 2003. On average, workers spread their investments across 4.3 asset classes in 2008.

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