International, Lifestyle Funds a Hot Spot in Quiet Trading Year

2006 proved to be a quiet trading year for 401(k) plans, with just 0.034% of balances shifted per day on a net basis during the year, according to the Hewitt 401(k) index, the lowest level since the inception of the gauge.
However, according to Hewitt, the true story lies within the movement between equity asset classes; company stock and large U.S. equity funds saw the largest transfer outflows among any asset class for the year 2006. At the same time, international and lifestyle funds received the largest inflows.

While international equities represented just 2.5% of total 401(k) balances at the beginning of 2003, after transfers, contributions, and strong performance in this asset class, participants now have 8.14% of balances in that asset class, on average, compared with just 5.24% a year ago. Hewitt notes that as the MSCI EAFE Index outperformed the DJIA for the fourth consecutive year in 2006, 401(k) participants continued to chase the performance of this hot asset class. For the year, $1.45 billion poured into this asset class – the largest annual aggregate transfer into international funds since the inception of the Index in 1997.

Attractive Lifestyles

As lifestyle funds become more popular, the asset class continues to attract new contributions and monies transferred from other funds. Participant discretionary contribution to lifestyle funds increased from 9.0% at the beginning of 2005 to 15.7% by the end of 2006. In addition, nearly $1.3 billion were transferred to these funds between 2003 and 2006. Those shifts notwithstanding, lifestyle pre-mixed offerings, which made up 6.69% of the total asset allocations tracked by the Hewitt 401(k) index, were only marginally ahead of the proportion of total asset allocations of 6.17% a year ago. Still, Large US equity funds attracted 21.29% of participant contributions, and GIC/Stable Value offerings received more than 17% of new participant contributions in December 2006 (international funds attracted roughly the same 10% share as did company stock).

In terms of overall equity allocations, Hewitt noted that the discretionary contributions made by 401(k) participants increased by 1.3% during 2006 to a 67.5% allocation to equity investments at the end of December.

Traditional Classes Still Dominate

However, despite a trend in net transfers favoring fixed income in 2006, the overall equity allocation still increased from 67.1% to 68.7%, due to new contributions and the strength of returns. And, despite the 2006 trends, when the dust settled, the asset categories that have traditionally dominated the mix continued to do so. Large US equity held the largest share of the overall allocation, 21.35%, nosing out Company Stock (20.64%), and GIC/Stable Value, which composed 20.44% of the total.

In December itself, Hewitt notes that participant activities were consistent with the trend throughout the year 2006. The daily net transfer activity was below average (at just 0.03% of balances traded), and with only two above-normal trading days. 401(k) participants slightly favored fixed income funds on 11 of the 20 trading days during the month, on a net basis.

Among the transfers that did occur, 57% went toward international equities, 20.23% to lifestyle/pre-mixed funds, 5.41% to brokerage windows, 5.29% to emerging markets, and 5.11% to bonds. Those transfers were primarily “funded” by company stock, which represented more than 69% of the transfers out (a year ago, it also made up a large proportion – 62%).