Investing September 10, 2003

Participants Continue To Bail on Bonds

September 10, 2003 (PLANSPONSOR.com) - Participants continued to shift money into equity investments last month, according to the results of the Hewitt 401(k) Index.
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That shift marked a continuation of the trend that began in April, when US equity markets – and participants tracked by the Hewitt Index – reversed a year long shift to fixed income and stable value investments in the Hewitt Index, which tracks the movements of some 1.5 million participants.  

Transfers favored fixed income investments on just seven days in August, while trading levels remained firmly in normal trading ranges.   On average, daily net transfers totaled just 0.06% of the roughly $70 billion in 401(k) balances tracked by Hewitt last month, compared to 0.08% a year ago.   Hewitt notes that since the start of the major market rebound in April, there has been only one above-average day of net transfer activity ( June 3, see  June Transfers Favor Equity Investments – But Not Company Stock ) .

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Bond “Bail”

Those transfers continued to flow from bonds – nearly two-thirds of the month’s transfers came from those investments – while most of the rest came from company stock.   In fact, bond funds have been hit the hardest by transfers, with over $240 million flowing out of bond funds in August alone, and over $750 million flowing out since the beginning of April, according to Hewitt.   Small US equity funds sopped up about 30% of August’s transfer flows, while nearly 19% went into GIC/Stable value, and 13% went to international investments.

In August the Russell 2000 surged 4.5% while the NASDAQ was 4.35% higher, and the Wilshire 5000 rose 2.25%.   The Dow was 1.97% higher, and the S&P 500 gained 1.79%.   Both the Dow and the S&P 500 have risen for six straight months, while the NASDAQ has now gained ground seven months in a row.   The last time the Dow had six or more straight monthly gains was an eight-month run from December 1994 through July 1995. The S&P last had a six-month rally from January through June 1996, and the last time the NASDAQ had such a long winning streak was the 10-month period that ran from December 1994 through September 1995.

Still “Standing”

When the dust settled, the overall asset allocation in the Hewitt 401(k) Index was largely unchanged from the month before (see    Rising Markets, Temps Tempt Transfers ).   GIC/stable value was the most prevalent, comprising roughly a quarter of the total.   Company stock remained the second most represented holding, with 24.50%, while large US equities were roughly 21% of the total.   Other major segments were balanced offerings (7.19%), lifestyle/premixed (4.76%), and bond funds (3.84%).   At the end of August, the stock allocation of the Index reached 62% of total balances, bringing the level back to its July 2002 level, from a low of 56.6% in February of 2003 (see  Transfers Heat Up While Markets Melt Down in July ).

New contributions largely matched that mixture, with 23.6% going to GIC/stable value, 23.66% going to large US equity, and company stock drawing 18.4%.   Lifestyle/premixed captured 6.36% of new contribution dollars, while bond funds got 6.21%, and balanced funds drew 4.76%.

A “normal” level of relative transfer activity is 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.

Benefits September 9, 2003

Hewitt: Raises At 3.4% in 2003; 3.6% in 2004

September 9, 2003 (PLANSPONSOR.com) - Increases across the compensation board hit 27-year lows in 2003, as even the recent run of variable pay gains dropped off since gaining popularity in the 1990's.
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Average salary increases for 2003 were 3.4% for salaried exempt employees, 3.3% for salaried nonexempt employees, 3.3% for nonunion hourly workers and 3.5% for executives. Looking ahead, the forecast is only slightly better in 2004, with estimated increases of 3.6% for exempt employees, 3.5% for nonexempt employees, 3.5% for nonunion hourly workers and 3.7% for executives, according to Hewitt Associates’ US Salary Increase Survey.

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While increases pale in comparison from the recent high-level mark of 2001 – when base salary increases were 4.3% for salaried exempt employees and 4.5% for executives –the low salary increases are tempered with inflationary numbers that arerunning almost a point less than salary increase budgets.

The Conference Board, which earlier released similar salary budget projections (See Conference Board: Salary Budgets At 3.5% in 2003 ) is projecting a 2.6% rise in the Consumer Price Index for 2003 compared with a 3.5% average salary budget. Additionally, WorldatWork is projecting a 3.5% salary increase in 2003 (SeeWorldAtWork: Salary Budgets At 3.5% in 2003) and Mercer showed 3.3% increases (See Mercer: Pay Increases at 3.3% in 2003, 3.5% in 2004 ).These numbers are encouraging for employers that are trying to avoid a “double whammy” of declining salary increases and rising inflation.

Hewitt found inflationary numbers were not the main motivation for the overall salary increases. Rather, t he factors that have the greatest impact/influence on base salary spending for companies include:

  • position in the marketplace (74%)
  • internal cost control (69%)
  • the economy (60%)
  • talent attraction/retention issues (48%).

Regional Variations

In 2003, the highest increases among salaried exempt employees were recorded in our nation’s capital at 3.9% for 2003 and are likewise projected to be the highest in the land at 4.2% in 2004. This was followed by similarly higher than average increases on the other Gulf coast in Houston of 3.7% in 2003. However, the Bayou City could not hold onto the high projections in 2004, when it fell to just 3.5%. Otherwise, salary increases cities across the country in 2003 and projections in 2004 looked like:

  • Minneapolis/St. Paul – 3.6% 2003; 3.6% 2004
  • Los Angeles – 3.6% 2003; 4.0% 2004
  • San Francisco – 3.5% 2003; 3.7% 2004
  • New York City – 3.5% 2003; 3.8% 2004
  • Chicago – 3.4% 2003; 3.6% 2004
  • Philadelphia – 3.4% 2003; 3.5% 2004
  • Atlanta – 3.4% 2003; 3.4% 2004
  • Dallas – 3.3% 2003; 3.4% 2004
  • Milwaukee – 3.2% 2003; 3.6% 2004
  • Boston – 2.9% 2003; 3.5% 2004.

“The cost of living may be one of the factors that salary increases in certain cities are higher than the national average,” said Hewitt’s Ken Abosch. “However, because companies are focused on tighter fiscal control these days, I don’t think we’ll see salary averages in most areas vary too greatly from the national numbers.”

Variable Pay

While companies continue to offer variable pay – a performance-related award that must be re-earned each year and does not permanently increase base salary – they are cutting back on the amount of spending. Nearly eight of 10 (77%) of surveyed organizations currently have at least one type of broad-based variable pay plan in place, which is not surprising when the same number (77%) of the responding companies believe the use of variable pay programs helps improve their business results.

However, company spending on variable pay for salaried exempt employees dropped to an average of 8.8% of payroll in 2003 and is expected to reach only 9% of payroll in 2004. Specifically, Hewitt’s study shows that the most common types of variable pay plans in 2003 were:

  • 59% – business incentives
  • 55% – special recognition
  • 47% – individual performance
  • 32% – stock ownership.

“Variable pay programs are designed to benefit both the employee and employer,” said Abosch. “However, there needs to be rigor around monitoring the goals and objectives of these programs, and communicating where the company and individual employees stand compared to the goals. Without this discipline, variable pay programs are destined to fail. Conversely, if the program is executed correctly, employees can be very goal-focused and motivated to meet and exceed their objectives, and thus maximize their variable pay potential. In this economy especially, successful variable pay programs can be an important factor in company success.”

Copies of the US Salary Increase Survey are available through www.totalcompensationcenter.com , or by calling the Hewitt Associates Publications Desk at (847) 295-5000.

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