The stock market's recent turmoil seems to be making 401(k) plan participants more conservative.
Inflows of participant dollars into equities continue, but at a slower pace than during the past two years. And more assets are finding their way into less volatile options, according to defined contribution service providers.
Industry experts say the real test will be the first-quarter investment statements soon going out to participants. The statements will show generally uninspired equity returns, and when combined with rising interest rates and the prospect of additional interest rate boosts, the outlook for the stock market is not good.
The recent rocky stock market - which saw the typical equity mutual fund return only about 2% in the first quarter after years of double-digit returns - is sparking participant interest in stable value, international and money market funds.
Most of the evidence is anecdotal; it's too early to have firm statistics on changes in participant behavior following the stock market's drop.
A spokeswoman at Merrill Lynch Asset Management, Plainsboro, N.J., reported there has been a "dramatic increase" in daily volume of exchanges out of other Merrill funds into its stable value fund.
Merrill Lynch manages about $49.3 billion in defined contribution assets.
Edmund Martinez, director of investments at Merrill Lynch Group Employee Services, said participant allocations to large-and small-capitalization domestic equities have slowed, and most redemptions have been invested in international equities and stable value funds.
He said the changes are "modest . . . but are noticeable."
The equity market's performance, coupled with the Federal Reserve Board's recent interest-rate hike, could prompt additional fund switching by participants.
"It is apparent that participants are re-evaluating their asset position," said Mr. Martinez. "I wouldn't be surprised to see more movement toward stable value funds and out of more aggressive funds."
At American Century Investments, Kansas City, Mo., 57% of the transfers between March 28, the day the stock market plunged 140 points, and April 1 after the market had taken another 157-point dive, were made to bond or stable value funds, from equity funds. That represents a turnaround from previous quarters when the majority of switching was into equity funds.
Tom Kmak, senior vice president, said the volume of switching activity was not unusually high, but the move toward conservative investments was notable.
"Once participants start getting their first-quarter statements," he said, "they may start calling."
American Century manages $19 billion in defined contribution assets.
Janet Price, vice president of daily valuation services for Sedgewick Noble Lowndes, Warminster, Pa., said, since March 31, "we've seen a lot of activity, with nearly a 50% increase in participant-initiated transfers." Of those, she said, nearly 40% were switching out of mutual funds and into money market and stable value funds.
"What I think is going to happen is .*.*. once they get their (first-quarter) statements and see their losses (in equities), we will probably see a lot more transfers," Ms. Price said.
Sedgewick provides record-keeping services for more than 150,000 plan participants, of which 20,000 have daily valuation.
A spokesman for The Vanguard Group, Valley Forge, Pa., said the growth in equity mutual funds from all sources has continued.
He said January saw record inflows from all sources but that equity mutual fund growth has "slowed considerably since then." But, he said, so far in April the Vanguard Retirement Savings Trust (GIC) fund experienced increased inflows from other mutual funds. According to the spokesman, net exchanges into the stable value fund were seven times as high in the second half of March as during the first two weeks of the month. "There is a definite trend of participants looking at stable value," said the spokesman.
Vanguard manages about $78 billion in defined contribution assets.
Tom Chapin, principal, who manages the $3.1 billion Vanguard fund, said the fund experienced negative exchanges in January, but the situation reversed in February and March. The fund had a net gain of $100 million in the first quarter.
Officials at State Street Global Advisors, Boston; T. Rowe Price Associates, Baltimore; New York Life Benefits Services Inc., Norwood, Mass.; and Northern Trust Retirement Consulting, Atlanta; say they have not yet detected any trend by 401(k) participants toward to more conservative options from equities.
Michael Seidenburg, principal at William M. Mercer Inc., Philadelphia, said he hasn't seen any increase in participant shifts, but doesn't rule out such activity.
"If participant statements show things aren't as good as before (in the equity market), and they are reading the popular press about hard times in the equity market, and (Fed Chairman Alan) Greenspan says things are getting worse, you may see more movement toward money market funds or GICs. We need a little more time" to see any major shift, said Mr. Seidenburg.
The flurry of activity toward stable value funds is heartening to an industry that has seen assets committed to such funds since 1994 shrink in direct proportion to the explosion of commitments to equity funds.
Certainly, stable value/guaranteed investment contract funds aren't poised to dominate 401(k) asset mixes as they once did. But quarterly cash flow into such funds has increased since the second quarter of 1996, noted Kelli Hueler, president of Hueler Analytics, Minneapolis, which monitors a universe of 29 pooled stable value funds with assets of $28 billion.
"The first quarter of 1997 has been the strongest of all," she said.
Karl Tourville, principal at Galliard Capital Management, Minneapolis, which manages the $1.8 billion stable value fund for Norwest Bank, said the stable value fund has seen net inflows of more than $200 million in the first quarter.
Mr. Tourville said participants in the funds also served by the Galliard fund still seem to favor equities, "but they are no longer transferring out of the stable value fund."
Robert Krebs, director of pension services at NISA Investment Advisors, St. Louis, said he is not surprised to see the increased allocation to stable value funds in participant-directed funds.
Mr. Krebs said in the 12 "very large accounts" he works with, stable value assets have been "getting cash quicker than we expected."
