Sunday, June 04, 2006

Markets Timing?

Last week Hewitt Associates published some fascinating results from their 401(k) Index – basically a composite of the activities of some 1.5 million participants for which the Lincolnshire, Illinois-based firm performs recordkeeping services. Over the years – Hewitt has been publishing the results of the index since 1997 – it has been interesting to watch the shifts in contribution allocations, as well as how – and how often – participants reallocate their existing balances.

For the past four months, that index has noted a distinct shift to international and emerging market offerings by participants who made transfers (admittedly a small number of the total – see Xfers Continue To Have International Flavor). However, last week’s report noted that, in plans that offer emerging market equity funds (only about one in ten plans in Hewitt’s database do), among participants with any balances in emerging market equity funds, the average allocation is 16.4%.

Now, it seems to me that that’s a significant number for these programs – but one might look at the robust gains these funds have enjoyed in recent months and attribute much of that surge to the machinations of the marketplace. However, Hewitt went on to note that lower tenure participants, in particular, have heavy allocations to such funds, drawn to their “recent strong performance history, no doubt, in the course of making their initial fund selections.” How much? In fact, participants with less than one year of tenure that had balances in emerging market equity funds at the end of 2005 had an average emerging market equity fund allocation of 20.3% - and total international (developed and emerging markets) fund allocations amounted to nearly 40% of equity balances for this group. Indeed, nearly one in ten (8.9%) had half or more of their balances in emerging market equity funds.

What does all that mean? Well, as Hewitt notes, for newer participants the trend might suggest that “a material number” of these participants were not pursuing diversification, but were chasing returns. Longer tenured participants? Well, Hewitt noted that it could well be due to the strong growth in those funds – and the failure of participants to rebalance (participants with more than 30 years of tenure had 13.7% of their balances in emerging markets funds). In sum, it might suggest both that participants were paying too much attention to short-term results at the point of signing up, and that participants weren’t paying enough attention to the same trends once they actually got into the plan.

Perhaps. But maybe, just maybe, participants are actually paying attention to the right things – and trying to take advantage of a good investment. What do YOU think?

- Nevin Adams

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