Investing May 11, 2004

Hewitt: 401(k) Participants Rush Back To Equities

May 11, 2004 (PLANSPONSOR.com) - Bucking a trend set in March of retreating to bonds in the face of market weakness, 401(k) participants voted in favor of stocks in April.
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April equity investments inflow – favored on 71% of the days in the month – was a bit of an anomaly since investors historically have favored stock investments on days when the broader markets have been positive. Yet, in the month, the S&P 500 was up only 11 days while investors clamored into equity investments on 15 days, according to data aggregated for Hewitt Associates 401(k) Index.

The remaining six trading days in April – 29% of the total – saw investors turning to bond investments.   By comparison, in March participants favored fixed-income options on 70% of days, an exodus that made March 2004 the most bearish month of transfers since early 2003 (See  K Plan Participants Transfer To Bonds in March ).   Part of the shift in participant behavior from March to April Hewitt attributed to investors concerns about the direction of interest rates, as overall bond investments experienced the greatest outflows from 401(k) participant accounts.  

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Outside of perceived fears about a possible hike in interest rates, Hewitt also said investors may be turning to stock as a sign of confidence in a sustained recovery of the equity markets.   To support this contention, Hewitt notes year-to-date in 2004, more than 70% of contributions have been directed to stock investments, compared to 63% in 2003 and 68% in 2002.  

April held firm to 2004’s trend.   Leading all other categories in terms of greatest monthly inflows was Small U.S. Equity with a 41.44% inflow, followed by other equity categories:

  • Large U.S. Equity – 22.61%
  • International – 15.00%
  • Mid U.S. Equity – 14.04%
  • Self-Directed Window – 3.46%
  • Emerging Markets – 3.45%.

Outflows, on the other hand, were dominated by bonds a category that recorded an outflow of 67.69% in April.   This was followed by outflows of 19.14% in money markets, 10.14% in company stock, 1.85% in GIC/Stable Value, 0.90% in Balanced, 0.15% in Lifestyle/Pre-Mix and 0.14% in Specialty/Sector.

Overall, transfer activity in April was light with average daily net transfers totaling just under 0.05% of the roughly $70 billion in 401(k) balances tracked by Hewitt, as there were only two days when transfer activity exceeded normal levels in April.   One of those days, April 22, was rather peculiar as investors moved toward fixed income despite the S&P 500’s 1.41% gain, the highest gain of the month.

Participant Allocations

As April drew to a close, the majority of participant funds were held in Company Stock (24.42%), followed by GIC/Stable Value (22.76%) and Large U.S. Equity (22.02%).  Other holdings included:

  • lifestyle/premix (6.24%)
  • balanced (6.18%)
  • small U.S. equity (4.56%)
  • international (3.65%)
  • bond (3.16%)
  • mid U.S. equity (2.61%)
  • money market (2.52%)
  • self-directed window (1.31%)
  • emerging markets (0.42%)
  • specialty/sector (0.14%).

Other than Company Stock making up the lion’s share of new contributions in April (27.93%), new money into 401(k) investments followed a slightly different path than asset allocations.   After company stock, Large U.S. Equity took in 21.37% of new participant funds, followed by 16.47% going into GIC/Stable Value.  The rest of the contributions shook out as:

  • lifestyle/pre-mix (7.63%)
  • small U.S. equity (6.20%)
  • bond (4.95%)
  • international (4.06%)
  • mid U.S. equity (3.50%)
  • balanced (3.52%)
  • money market (2.66%)
  • self-directed window (0.97%)
  • emerging markets (0.62%)
  • specialty/sector (0.18%).

The benchmarks were uniformly down in April.   Leading the descent was the Russell 2000 (-5.10%), followed by:

  • Nasdaq (-3.71%)
  • Lehman Aggregate (-2.60%)
  • MSCI EAFE (-2.26%)
  • S&P 500 (-1.57%)
  • Dow Jones (-1.14%).

More information and Hewitt’s data can be found at  http://was4.hewitt.com/hewitt/services/401k/observ/04_april.htm .

Administration May 10, 2004

Ruling Expected in $17M Philadelphia Pension Abuse Suit

October 5, 2004 (PLANSPONSOR.com) - A Pennsylvania state court judge is expected to rule Wednesday in a class action lawsuit in which 12,000 City of Philadelphia employees charged that the city mismanaged their pension plan over 11 years.
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The employees 1994 suit was tried as a nonjury trial before Common Pleas Court Judge Stephen Levin in July. Levin is scheduled to hear closing arguments in the case Wednesday and rule soon after that, the Philadelphia Inquirer reported. The plaintiffs have asked for a damage award of $11.6 million plus up to $5 million in compensation to the fund.

At issue in the legal fight are two contracts the city awarded to private companies to manage the Philadelphia Employees’ Deferred Compensation Plan during the administrations of former Mayors W. Wilson Goode and Edward Rendell.

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Plaintiff lawyer Steven Angstreich has asserted that city was “grossly negligent” in overseeing the management companies that received generous fees from the pension plan while allegedly losing millions of dollars on investments, the Inquirer report said. For the city’s part, chief deputy city solicitor Michael Eichert denies any negligence by the city.

The dispute focuses on a period when the city Finance Department had authority over the pension plan and was responsible for awarding the management contracts. Since 1995, the plan has been under the supervision of the city Board of Pensions.

The two management firms in question, not named as defendants, are Public Employees Benefit Services Corp. (Pebsco), of Columbus, Ohio, chosen by the Goode administration in 1984, and Copeland Associates Inc., of New Brunswick, New Jersey, chosen by the Rendell administration after the first firm’s contract was canceled in 1993.

Angstreich contends that during the Goode administration in the 1980s, Pebsco offered pension plan participants a “completely unsuitable and excessively overpriced” life insurance option through which 5,900 city employees lost $3.7 million, the Inquirer said.

In 1992, the Rendell administration canceled Pebsco’s contract and sued the company in US District Court, claiming Pebsco had received $1 million in commissions on the sale of life insurance policies. The firm countersued for the cancellation of its contract. The city settled the case in 1994, paying Pebsco $200,000.

The lawsuit also alleges that the Rendell administration made a bad investment in 1992, transferring $27.4 million from a long-term security that would have paid a fixed rate of 7.3% to shorter-term investments paying lower rates. The lawsuit says the transfer led to a $3.5 million loss – in reduced income – over a two-year period.

The city’s lawyers argue that the transfer was made to diversify investments, trading a high return rate from a single investment to a lower return rate for several investments intended to be safer.

Angstreich also contends the city allowed both Pebsco and Copeland to “gouge the plan with excessive administrative and investment service fees.” The city disputes that, arguing that both contracts were awarded properly to the lowest bidder.

The city Solicitor’s Office sought unsuccessfully to have the case dismissed on grounds that municipal governments were immune from negligence claims. Levin rejected that argument in 2002 and allowed the case to go to trial.

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