October Has Some Above-Normal Transfer Volumes

These days of heavy activity took place on October 7, 8, 9, 17, 18 and 21. The high volumes coincided with the timing of lawmakers’ negotiations on the government shutdown and debt ceiling. Through the month, daily transfer activity averaged 0.035% of total account balances per trading day. The monthly average was moderately above the trailing 12-month daily average, at 0.030%.

The index defines a normal level of relative transfer activity as when the net daily movement of participants’ balances, as a percent of total 401(k) balances within the index, equals between 0.3 times and 1.5 times the average daily net activity of the preceding 12 months.

October began with investors focused on the government shutdown and concerns about a potential government default should the debt ceiling not be raised, according to the index. Late in the day on October 16, Congress reached a deal to reopen the government and raise the debt ceiling. This deal, combined with the speculation that the Federal Reserve may further delay any plans to start tapering its bond-buying program, had a positive impact on capital market results for the month.

Large U.S. equities, as measured by the S&P 500 Index, gained 4.6% during the month. Small U.S. equities, as measured by the Russell 2000 Index, gained 2.5%. Interest rates continued to decline, since rising in early September, with the yield of the 10-year Treasury falling to 2.57% at the end of the month. The Barclays Aggregate ended October in positive territory, rising 0.8% for the month. Positive news from Italy, the UK, Asia, the Czech Republic and China helped bolster international equities. The MSCI EAFE Index and MSCI Emerging Markets Index posted October returns of 3.4% and 4.9%, respectively. Commodities were the worst-performing asset class in October, negatively impacted by falling oil prices.

In October, 61% of the trading days favored equities instead of fixed-income investments. The first seven trading days of the month moved toward fixed income at an accelerated rate. Transfers then reversed direction toward equities after October 9, with the exception of two trading days.

Net transfer activity for October heavily favored diversified equities (equity assets excluding company stock) with $384 million (0.26%) flowing in. Total activity across the Aon Hewitt 401(k) Index was moderate with $428 million transferring for the month.

Outflow activity was led by company stock funds, with $143 million (33%) transferring out, and also by GIC/stable value funds, with $141 million (33%) transferring out. In addition, bond funds had $100 million (23%) of outflows, and premixed funds decreased by $30 million (7%).

Net inflows for October were led by large U.S. funds, which received $141 million (33%) from flows. International funds received $127 million (30%). Both small U.S. funds and mid-sized U.S. funds also had increases, each with $102 million (24%) and $41 million (10%) of inflows.

Employee discretionary contributions, another measure of participant sentiment, increased to 65% in equities for October, up slightly from 64.9% in September.

Finally, the index showed that as markets rallied and transfer activity favored equities, participants’ average equity allocations reached 64.1% by the end of October, up from 63.3% at the beginning of the month.

More information about the Aon Hewitt 401(k) Index for October can be found here.