After being battered by a three-year downturn in the stock market that sent many investors fleeing to bond and stable value funds, 401(k) plan participants are starting to warm up to stocks again.
The move by self-directed defined contribution plan participants to equities isn't of the frenzied nature of the 1990s, and may never reach that fevered pitch again, industry observers say. But they note a definite trend toward equities.
That trend neatly coincides with this year's uptick in the stock market - the Standard & Poor's 500 index gained 11.8% in the first half of 2003 - leading many in the industry to point out that some 401(k) participants may be trying to time the market.
Others say participants are moving into equities partly to rebalance out of bonds after a bond market runup over the past three years. The Lehman Brothers Aggregate Bond index returned an annualized 10.08% for the three years ended June 30, while the S&P 500 returned -11.2%.
This movement into equities began late in the first quarter of 2003, then gained momentum early in the second quarter. The Hewitt 401(k) index, the industry's most widely used gauge of participant activity, shows money moving out of bonds and into stocks on 81% of the days in June and most days in April and May.
"In all, for the second quarter, close to $1 billion - or 1.4% of balances - transferred from fixed-income funds such as GICs/stable value, bond and money market funds," a Hewitt report said. In June, according to Hewitt, 49.6% of assets shifted came from stable value/guaranteed investment funds; 25% came from bond funds; and 22% from company stock.
Most of those assets were shifted into large-cap (44%) and small-cap (24%) domestic equity funds. About 9% was shifted into U.S. midcap stocks.
"People are more optimistic about transferring money because of the market gains. There is a direct relationship between the market improvement and participant transfer activity," said Lori Lucas, Hewitt consultant in Lincolnshire, Ill.
The Hewitt index measures activity by 1.5 million 401(k) plan participants with total assets of $70 billion.
"The shift toward equities is substantial," said Hubert L. Harris Jr., chairman and chief executive officer at AMVESCAP Retirement Inc., Atlanta.
Mr. Harris said equity allocations in plans administered by AMVESCAP jumped in just three months to 54% on June 30 from 46% as of March 31. At the same time, he said, allocations to cash and bonds dropped to 34% from 44%.
He noted that participants had shifted to stable value and cash when the equity market was hurting. "Now, I think people are reacting with more confidence in the market and realize that the world is not coming to an end. We saw a movement into equity-based products in the second quarter. Now, will it continue?"
Ward Armstrong, president of American Express Retirement Services, Minneapolis, said there has been a "significant increase" in participants moving assets into equities from other options. Equity allocations in 401(k) plans increased about 20% during the second quarter of 2003 alone, he said; some of the increase was due to market appreciation, but "people are definitely making the move to equities."
"I believe people followed the market down in measured terms and are doing that on the way back up," Mr. Armstrong said. "Participants are more aware of asset allocation and investment advice and are apparently heeding that now."