Net 401k Participant Transfers Almost Neutral in September

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Simply put market timing does not work. In the end we must believe that free markets work and in the long run a globally diversified portfolio will succeed in the long term. We are investing for the long term not looking for the next hot asset class.

On average, 0.03% of balances transferred on any given day. This is in line with the trailing 12-month average daily net transfer activity levels.The direction of transfers was almost neutral for the month. Although 401(k) participants moved their account balances out of fixed income funds and into equities on a majority of days (57%), the net dollars transferred went the opposite direction. A total of $60 million was transferred out of equities and into fixed income investments, representing 0.05% of total assets.

For the quarter, transfers were strongly fixed income oriented. A total of $1.4 billion moved out of equities and into fixed income investments, which represented 1.1% of total assets. The vast majority of these transfers took place in July ($946 million) and August ($432 million), according to Aon Hewitt data. 

Nearly all equity asset classes saw some outflows. Small U.S. equity funds saw the largest outflows in September, totaling $41 million. For the quarter, they lost $321. Premixed portfolios had $34 million of outflows for the month and $268 million for the quarter. 

401(k) participants also moved away from large U.S. equity funds and international funds. Large U.S. equity funds lost $25 million in September and $472 million for the quarter. International funds had $14 million transferring out for the month, and $243 million during the third quarter.

Fixed income asset classes received most of the net transfers. Bond funds received the largest amount of inflows in September, with $106 million moving to this asset class. For the quarter, $383 million flowed into bond funds. Stable value funds and money market funds also received $1 billion and $145 million for the quarter, respectively.  

Participants’ overall equity allocation was down 1.8% from 58.7% to 56.9%. Aon Hewitt said this was mainly due to the significant loss in the stock market.

Participant discretionary contributions to equities (employee only contributions) also declined slightly from 62.1% to 61.9% in September.

This more evidence that plan participants are actively trading their account balances based on emotions and not part of a strategy. The retirement plan is intended to be invested for the long term. Remember market timing does not work.

Please comment or call to discuss how this affects your employees and yourself.

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Investors Get It Wrong — Again

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Time and time again investors listen to the financial media and make changes based on fear and greed. Remember the financial institutions make mon ey when you move your money. They don’t really care whether you make money or not.

The latest example of investors behaving badly comes from Morningstar. Once again, the past few years saw investors going the wrong way, moving assets from equity funds into bond funds, causing them to miss out on one of the greatest bull marketsever. The following data presents the behavioral gap for the one- and three-year periods ending December 2010:

  • Domestic equity funds — 2.0 percent and 1.3 percent per year, respectively
  • International equity funds — 0.6 percent and 0.8 percent per year, respectively
  • Taxable bond funds — 1.4 percent and 0.5 percent per year, respectively
  • Municipal bond funds — 1.1 percent and 1.5 percent per year, respectively

Investor activity cost tens of billions a year. The only category where the gap was relatively minor was for balanced funds. For both one-year and three-year periods, the gaps were 0.1 percent per year. Perhaps this is an advantage of balanced funds — investors in these funds tend to pay less attention, which the evidence demonstrates is a good thing.

The evidence demonstrates very clearly that investors would benefit greatly from learning from Warren Buffett, who stated in Berkshire Hathaway’s 1991 annual report: “We continue to make more money when snoring than when active.” In other words, at least when it comes to investing, inactivity is usually the better strategy. Remember this the next time you’re tempted to alter your asset allocation in reaction to the market’s latest move.

This is evidence that investors need an adviser’s help to reach their goals. It is not about picking the right mutual fund, annuity or other financial product but rather developing and following a disciplined strategy.

Please comment or call to discuss how this affects you.

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Court Rules Kraft’s 401(k) Plan May Have Holes

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Plan sposnors as well as plan participants must understand that their 401k plan is a retirement savings vehicle and not a venue to speculate. When planning for retirement we must address two components, expected return AND expected risk.

The plaintiffs are participants in Kraft’s defined contribution plan, which had assets ranging from $1.5 billion to $5.4 billion between 1994 and 2010. They brought a class action alleging that Kraft and others breached their fiduciary duty by including two actively managed funds, a Growth Equity Fundand a Balanced Fund, among the investment options available to plan participants.The consultants to the plan only considered funds with a minimum seven year track record, with at least $500 million under management. They focused on the past returns of the funds selected, which were the primary determinant.

This focus on past performance is typical of the way actively managed funds are selected, even though (as everyone except consultants to benefit plans is aware) past performance is not predictive of future performance. One study looked at hiring and firing decisions by 3,700 plan sponsors (public and corporate pension plan, unions, foundations and endowments) over a 10 year period from 1994 to 2003. Three years prior to hiring, the fund managers selected all had stellar records of beating their benchmarks. Post hiring excess returns were zero or less.

This case is an excellent representation of how retirement plans are sold to many plan sponsors. I have taled with many advisers who boast of their “26 point check list” when screening mutual funds. These screenings are for the most part worthless.

Please comment or call to discuss how this affects you and your compoany plan.

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