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

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 – reversing 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 – 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.

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 here .