Defined contribution plan participants responded to market volatility in the first two weeks of March by chasing the hot-performing stock funds from last year.
Participants transferred a bit more money among options than they had in the past, moving portions out of large-cap equities and into small-cap, international and technology stocks.
And, they are pressuring plan sponsors to add such investments if they are missing from their plans' menus.
"We are seeing higher levels of activity than normal," said Lori Lucas, defined contribution consultant for Hewitt Associates LLC, Lincolnshire, Ill. "It's still not high by typical standards. We are not seeing alarming activity."
Hewitt's 401(k) index tracks the daily investment transfer activity of 1.5 million U.S. employees in plans with more than $62 billion in assets. According to the index, transfers in February and March so far have been higher than in the same months last year.
Last month, for example, net transfer activity doubled to 0.13% of total balances tracked by the index, compared with 0.07% in February 1999, the Hewitt index showed.And, there were 10 above-normal transfer activity days last month, compared with seven in February 1999 and two in February 1998.
As of March 16, there were two above-normal transfer activity days in March, compared with two during the first half of March in 1999 and 1998.
The highest level of transfer activity so far this year was on Feb. 28, the day after the Dow Jones industrial average dropped below 10,000 for the first time since April. The Hewitt index reading on that day was 2.84, meaning transfer activity was nearly triple the index's daily average reading of 1.0. On that day, 0.22% of total balances tracked by the index moved out of fixed-income funds into equity funds.
The Hewitt index shows that net transfer activity remains consistently low in relation to total 401(k) balances -- approximately 0.08% per day on average.
Attention to style, sector
While there has not been much large-scale movement away from equities, plan sponsors and participants are paying more attention to styles and sectors within equities, said Neil Wolfson, national partner in charge of the investment consulting group from KPMG LLP, New York.
Participants are pushing plan sponsors to add small-cap funds and technology funds, which have outperformed large-cap stocks; and international funds, which have outperformed the domestic market in the aggregate, Mr. Wolfson said.
Michael Scarborough, president of The Scarborough Group, Annapolis, Md., said participants are "picking up on the sector rotation and moving from large-cap to small- and midcap.
The Russell 2000 small-cap index was up 14% from Jan. 1 to March 16; it was up 44% over the 12-month period ended March 16. The large-cap S&P 500, by contrast, was down 1% since the beginning of the year and up 13% for the same 12-month period.
And, like the markets themselves, participants are embracing growth and shunning value in both small- and large-cap equities, Mr. Wolfson said.
Meanwhile, more and more defined contribution plan sponsors are seeking funds that have high concentrations in technology stocks, he said.
"Conventional wisdom was that technology was a sector and not an asset class," Mr. Wolfson said.
But that is changing because technology has been growing in size and because it has performed so differently than the rest of the market, Mr. Wolfson said.
Overall, the Dow Jones industrial average was down 7% year-to-date as of March 16; but the Nasdaq, the index on which many technology stocks are listed, was up 16%. The Nasdaq was up 92% in the 12 months ending March 16, compared with the Dow, which was up 6% during that period.
At Ernst & Young, questions from participants to the firm's toll-free help line are becoming more sophisticated and participants are asking new questions. Now, participants are asking whether their investment options are giving them enough access to the technology sector, said William Arnone, partner and national director, Ernst & Young, New York.
"A lot of participants are piercing the fund packaging and asking how funds are invested. I'm very encouraged by that," Mr. Arnone said.
Officials at The Vanguard Group, Valley Forge, Pa., and Fidelity Institutional Retirement Services Co., Boston, said investors are staying put.
But Peter J. Smail, president of Fidelity Institutional Retirement, said trading volume may have stayed the same, but call volume goes up 10% to 20% on volatile market days.
At Diversified Investment Advisors, New York, transfer activity among defined contribution participants doubled in December, January and February from an average volume of 3,000 to 4,000transfers a month, said Peter G. Kunkel, vice president for client services.
"Generally, all (of those who transferred) have fairly good diversification and now are taking the profits of their investments to other kinds of stocks," Mr. Kunkel said. "They're certainly enamored with technology stocks."
Still, it may be too soon to tell how participants will respond to market dips, since they do not get their statements until the first week of April, Ernst & Young's Mr. Arnone said.
"Even then it should not result in too many changes because it is just one quarter," he said. "Not until there have been back-to-back negative quarters. And there have not been back-to-back negative quarters in 401(k) history."