Investing November 11, 2003

401(k) Investors Cautiously Return to Equities in October

November 11, 2003 (PLANSPONSOR.com) - As the broader markets showed improvement last month, so too did the flow of 401(k) participant money into equity investments.
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Investors began toeing the equity pool once again in October, reversing the move toward fixed income recorded last month, when US equity markets – and participants tracked by the Hewitt 401(K) Index – reversed a shift to equity that began in earnest in April.   Overall, the Index tracks the movement of some 1.5 million participants.

For October, transfers favored equity investments on 14 days, compared with fixed-income for nine, as trading levels remained stagnant.  On average, daily net transfers totaled just 0.07% of the roughly $70 billion in 401(k) balances tracked by Hewitt last month. 

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This corresponds withanormal level of relative transfer activity – when the net daily movement of participants’ balances as a percent of total 401(k) balances within the Hewitt 401(k) Index equals between 0.3 times and 1.5 times the average daily net activity of the preceding 12 months.   Since the end of March, the Index has seen only three above-normal transfer days. Last month, the most active transfer day was on October 1, with 0.14% of balances transferring on a net basis in response to a 2% increase in the Dow Jones Industrial Average.

Stock Stuffers

As usual, it was much more common on days when the market rose for money to move into stock funds than into fixed-income funds. Historically, 401(k) participants have elected to follow the market when transferring money – moving into stock funds on positive market days and into fixed-income funds on negative market days.   In October, equity had the lion share of the positive days (61%) to fixed income’s 39%.   

Hardest hit by the outpouring of participant funds was company stock, which accounted for 59.08% of the fund outflow, and GIC/Stable Value that composed 18.89% of the exiting participant dollars.  Bonds were the only other investment to note an outwardly flow (22.02%).

After snapping a six-month winning streak last month, October’s returns came back to the plus column, as the Russell 2000 increased 8.40%, while the NASDAQ was up 8.13%.   Likewise, the Dow Jones Industrial Average came in 5.87% better, and the S&P 500 managed to gain 5.66%.   In the red though was the Lehman Aggregate, down 0.93%.

Allocated Across

There was some shakeup in the overall asset allocation in the Hewitt 401(k) Index from the month before (See 401(k) Participant Flow Into Equities Hits a Wall in September ).  GIC/Stable Value no longer held the majority of participant assets, at 23.25% this category now trails company stock (24.80%). Large US equity (21.93%) held on to the third spot.  Other major holdings included:

  • lifestyle/premix (6.22%)
  • balanced (6.13%)
  • small US equity (3.96%)
  • bond (3.57%).

The steady flow of stock-fund oriented transfers, combined with market strength, has resulted in overall greater stock fund exposure for 401(k) participants’ accounts, Hewitt found. From a low of less than 57% in stock fund investments in February, 2003 (See Bearish Sentiments Send Participants Hibernating ), participant balances now stand at nearly 65% in stock fund investments.

New contributions painted a slightly different picture with GIC/stable value being the most prevalent investment option, comprising more than a quarter (27.26%) of the total.  However, company stock was the third most prevalent holding, with 17.17%, while large US equities were 22.55% of the total, coming in as the second most widely held.  Other major segments were:

  • lifestyle/premixed (7.16%)
  • small US equity (5.32%)
  • bond (5.30%)
  • balanced (4.10%).
Compliance November 10, 2003

SEC Fills in Sarbanes-Oxley Details

October 23, 2002 (PLANSPONSOR.com) - Congress may have laid out general reform measures to deal with the corporate world's financial scandals, but it is up to the US Securities and Exchange Commission (SEC) to fill in the details.
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That’s why SEC officials have scheduled two meetings for October 30 and October 31 to further consider proposals mandated by the Sarbanes-Oxley Act of 2002 passed as part of a sweeping corporate accounting reform, according to a Dow Jones news report.

In the October 30 session, the SEC will consider proposing rules for the use of pro forma financial information in company earnings reports. It will also consider a rule to require companies to discuss off-balance sheet arrangements in their Management’s Discussion and Analysis section in annual and quarterly reports.

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Under the new rules, companies may be required to provide a table of contractual obligations due in the short and long run, and either a table or text disclosure of total contingent liabilities and commitments in the short and long-term, the Dow Jones story reported.

Also scheduled for October 30, the SEC will look into rules that would prohibit a company’s directors and executives from purchasing, selling, or otherwise transferring any equity securities of the company during a pension plan blackout period in which line employees are also prohibited from making equity transactions in company stock, Dow Jones said.

This rule would also require companies to provide advanced notice of pension plan blackout periods.

New Attorney Standards

The next day, the SEC said it would consider rules establishing standards of professional conduct for attorneys who represent companies before the commission.

These standards would include a rule requiring an attorney to report evidence of a material violation of securities laws or breach of fiduciary duty by the company or its officers to the chief legal counsel or the chief executive officer of the company, the SEC said.

If these executives don’t respond appropriately, the attorney may be required to report the evidence to the audit committee, another committee of independent directors or the full board of directors, Dow Jones said.

Finally, the SEC will look into changing the definition of terms used in the definition of dealer for banks under certain securities laws. These proposals relate to the implementation of the specific exceptions for banks from the definitions of “broker” and “dealer” that were amended by the Gramm-Leach-Bliley Act, the SEC said.

On October 16, the SEC proposed new rules to  strengthen corporate controls and ethics .

According to the Dow Jones story, those proposals would require companies to designate a financial expert on their corporate boards, adopt internal controls, and disclose whether they have a code of ethics. Another proposed rule would bar corporate executives from coercing, manipulating, or misleading the firm’s auditor.

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