When 401(k)s were riding high with the stock market in the 1990s, supporters contended the steady flow of defined contribution plan dollars would keep the U.S. stock market afloat.
Now, that theory seems all wet.
As the stock market dropped 6.76% in June, domestic stock mutual funds - the investment vehicle of choice in 401(k) plans - had an outflow of $18.7 billion in June, vs. an inflow of $2.77 billion a month earlier, according to the Investment Company Institute, Washington. Overall, the equity fund outflow was $18.05 billion, vs. an inflow of $4.88 billion in May.
"The movement in the 401(k) plans is not high enough to dampen the swings we see in the overall market," said Ann Mahrdt, director of the Spectrem Group, Chicago. "Even though it is a fairly large segment, it's not really impacting the market."
Active movement out of equities, lack of rebalancing and market fears are disproving the market-boost theory.
The ICI figures are just one sign that defined contribution participants are straying from the stock market.
In June, 401(k) equity allocations were as low as they've been in the five years that Hewitt Associates LLC, Lincolnshire, Ill., has been tracking, through its 401(k) index, participants' transfer behavior. Equity slid to 64.9% of total balances, down from the index's high of 74% in late 2000.
While there were no unusually large moves in June, 401(k) assets moved consistently from equity to fixed-income investments, according to Hewitt. On 85% of the days in June, the majority of assets transferred went to fixed income, the highest portion in any month since 1987.
The big loser was large-cap U.S. equity investments, which suffered from significant outflows of about $275 million in net transfers in June, according to Hewitt.
While some plan participants are actively moving their money out of equities, others are not rebalancing their portfolios, also contributing to the lower equity allocations. Because of the failure to rebalance, market forces are dragging down the amount of stock investments participants have, according to the Hewitt 401(k) Index June commentary.
Hubert Harris, chief investment officer of INVESCO Retirement Inc., Atlanta, thinks the steady flow of investments has benefited the market. But he acknowledged that beginning in July, a greater percentage of 401(k) plan participants shifted out of equities and into bonds or cash equivalents, and this shift had a negative effect.
"At the end of the day, the market is a combination of fears," Mr. Harris said. "When the market's negative for a prolonged period of time, I don't think 401(k) cash flow would be enough to buoy the market."
Never large enough
Some observers say even defined benefit assets were never large enough to bulk up the market.
"No money coming from one group ever props up the market for the long run," said John Tobey, senior vice president and CIO of ICMA Retirement Corp., Washington.
"The first time we learned that lesson was in 1972." At that time, pension plans were increasing their allocations to equities, and were the largest contributors of new flows into equities. Then the market dropped. Many investors started cashing out, and pension money alone could not offset the market's fall, Mr. Tobey said.
"It shows how the market can turn in the face of quite a bit of money from one group," he said.
Still, many industry insiders say the system is working the way it was meant to function.
"Nothing's changed. The engine's still there. It's still contributing $160 billion a year," said Peter Starr, managing director of Cerulli Associates, Boston.
Although the engine is far from shot, the carburetor might need to be adjusted, Mr. Starr acknowledged.
"The social experiment of defined contribution plans...helping Americans save for retirement is predicated on the market's ability, over time, to return 9%. Whether that's enough is another discussion." If the market decline persists, some participants may not have enough time to reach that magic figure, he said.
DC plan impact
"The market correction would have been much worse had it not been that for defined contribution plans," said David Wray, president of the Chicago-based Profit Sharing/401(k) Council of America. "Cash flows into plans are up. Plans are net buyers of equity ... and there's more money going into equities than going out."
Warren Cormier, president of Boston Research Group, Boston, agreed with Mr. Wray about the market impact. "Had this money been hot, had people been moving money around like savvy retail investors ... you would see a lot of money out of equities and into cash," Mr. Cormier said. "Right now, the only movement we see is toward fixed-income-type investments."
In 2001, some $150 billion was added to retirement accounts, both defined contribution and individual retirement accounts, said Avi Nachmany, executive vice president and director of research for Strategic Insight, New York.
The pool of retirement money is growing, mostly because of rollovers, and the majority of the retirement money captured through mutual funds was in equities.
"The money that has gone into these plans on average tends to be stickier and more stable," Mr. Nachmany said.