The Markets March 13, 2008

401(k) Participants Still Fleeing Equities

In February, the weak stock market again led 401(k) participants to flee equity investments for fixed income funds, according to the results of the Hewitt 401(k) Index.
Reported by

By month end, nearly $219 million in balances transferred out of equities and into fixed income investments on a net basis, the Hewitt data showed. Approximately 80% of the net transfers flowed into GIC/stable value funds. Lifestyle funds received the second largest net inflow of $46 million.

U.S. equity funds took the biggest hit as a total of $80 million transferred out on a net basis during the month. However, the activity was much less significant than the $521 million net outflows experienced in January. International funds, which attracted nearly $1.2 billion in 2007, also experienced net outflows of $74 million in February, following January outflows of $489 million. Company stock funds had $68 million transferring out in February.

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

Participants’ total equity allocation also declined slightly to 64.0% – the result of both market weakness and participant transfers. The equity allocation is now back to nearly the same level as in July 2004, Hewitt said. GIC/Stable Value held the largest portion of 401(k) assets among all asset classes at the end of February, followed by Large U.S. Equity (19.12%) and Company Stock (16.41%).

However, Large U.S. Equity was the winner of overall contributions to 401(k)s for the month (18.16%), followed by Company Stock (16.39%) and Lifestyle/Pre-mix funds (14.48%). Participant-only contributions also mostly were invested in Large U.S. Equity (21.03%). Lifestyle/Pre-mix funds gained 15.92% of participant-only contributions and GIC/Stable Value investments gained 15.04%.

Net transfers by 401(k) participants were fixed income oriented during 70% of the days in February, according to the Index. However, overall participant activity slowed down significantly compared to January. Only 0.04% of plan balances transferred on a daily basis in February, which was in line with the twelve month trailing average, and much lower than the 0.09% daily transfer experienced during January 2008. For the month, transfer activity was above normal on two days.

The Hewitt data is here.

Data & Research March 13, 2008

Move From DB Often Includes Improved DC Offering

Many employers who have followed the trend of moving from defined benefit to defined contribution retirement benefits have also beefed up their DC offering, but it is still not as beneficial to workers as having both plan types.
Reported by

That was the conclusion of a new Watson Wyatt research paper of the results from a new poll of 300 large employers about their retirement plan designs, a news release said.

Over the past decade, four in 10 respondents swapped out their DB plan for a DC plan as their primary retirement savings vehicle for new hires. More than 75% of those enhanced their DC plan, with 52% opting for the addition of or an increase to a non-matching contribution, Watson Wyatt found.

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

“With the change in markets and the increasingly diverse workforce, retirement plans have also been in flux,” said Alan Glickstein, senior retirement consultant at Watson Wyatt, in the news release. “Most employers that have changed retirement designs have also enhanced their 401(k)s. The question is whether this will provide enough security for employees to retire when their employers think they will.”

Virtually all surveyed companies (97%) contribute to their employees’ DC plans. Companies that offer new hires only a DC plan contribute, on average, a maximum of 5.82% of pay, including matching and non-matching contributions, the research found.

Employers that offer new hires both a DB and a DC plan contribute an average of 4.4% of employees’ pay to their DC accounts. While employers that have shifted from DB plans to DC plans contribute an additional 1.4% of pay to employees’ DC plans, these additional contributions replace only a portion of the benefit provided by a DB plan, typically valued at 5.5% of pay, according to Watson Wyatt’s COMPARISON, a comprehensive benefits database.

Nearly one-fourth (24%) of surveyed companies adopted a hybrid plan during the last 10 years. Hybrid conversions accelerated in the late 1990s but declined in the early 2000s because of increased uncertainty in the legal and regulatory environment. While, the primary reasons for closing or freezing of a DB plan are cost and volatility; the main reasons for converting to a hybrid plan are employee satisfaction and retention, the report said.

Copies of the report, “Retirement Plan Design: Past, Present and Future,’ can be ordered here.

«