Hewitt Index tracks 401(k) participant trading activity

While the stock market has long had a variety of indexes to track trading activity, no index has ever followed the growing number of 401(k) participants exclusively ... until now, according to a press release from Hewitt Associates.

Hewitt announced earlier this fall the creation of the Hewitt 401(k) Index, the first barometer of daily 401(k) investment activity of employees at large U.S. companies. The Hewitt 401(k) Index tracks the daily transfer activity of 1.4 million 401(k) plan participants in selected large employer plans with more than $62 billion in collective assets. The index can be viewed online at

http://www.hewittindex.com.

In addition, the Hewitt 401(k) Index Web site reports the flow of money into and out of 12 asset classes and relates the Hewitt Index to daily stock market activity, the release stated.

The Hewitt 401(k) Index Web site also provides additional information, such as monthly summaries of 401(k) asset allocation, new contributions and detailed transfer data. The result is a glimpse into how specific market events, such as the Asian currency crisis or a stock market dip, affect 401(k) plan participants' degree of confidence in the market and their investment decisions, Hewitt stated.

"As defined contribution plans become the dominant vehicle for retirement savings in the U.S., it becomes more important every day that we help participants in such plans make informed and appropriate investment decisions," said William F. Sharpe, Nobel Laureate and professor of economics at Stanford University. "A key ingredient in this process is understanding the actions participants are taking, both in their initial investment choices and in changes in their allocations among major asset classes."

Sharpe added, "Until now, most statistics on changes were scattered, based on small samples, and/or subject to errors due to the lack of an ability to clearly separate inflows and outflows from transfers of pre-existing funds. Hewitt's new index is not subject to any of these problems. It thus provides an important tool for plan sponsors and others to use in the common quest to realize the full potential of defined contribution plans as the primary savings and investment vehicle for the majority of the American population."

Today, 401(k) assets represent the largest pool of money invested in capital markets more than a trillion dollars, according to Ricardo Reinking, chief architect of the index and a consultant with Hewitt Associates.

"Given the large sums of money involved, it's certainly not difficult to see why the market has a strong interest in the choices 401(k) investors are making," he stated. "Hewitt handles 40l(k) administration for over 40 percent of the large-employer market, so we are uniquely positioned to track and evaluate 401(k) investor behavior as it relates to market events."

Interpreting the index. Reading the Hewitt 401(k) Index is a two-step process. First, the Hewitt Index shows the daily level of dollar transfer activity above or below a one-year rolling average on each business day, the company stated.

An "average" level of transfer activity (calculated on a rolling basis starting Aug. 1, 1997) is equal to a Hewitt Index reading of 1.0. readings higher than 1.0 indicate heavier trading than usual, while readings less than 1.0 indicate lower-than-average trading activity.

In addition, each daily Hewitt 401(k) Index reading is accompanied by one of two directional indicators. An "(eq)" following the Hewitt Index indicates the majority of money on that day flowed into equity funds (and out of fixed-income funds), while an "(fi)" shows the opposite more than half of the money transferred that day moved into fixed income funds (and out of equity investments).

For example, on April 27, 1998, the Hewitt 401(k) Index reading was at 2.02(fi), indicating that trading activity was slightly more than double the daily average since Aug. 1, 1997, and that money moved into fixed-income asset classes. Upon further examination of additional data, it's clear that most of the activity came from money moving into stable-value funds from domestic large-cap funds, the release said.

As another example, on June 22, 1998, the Hewitt Index reading was 0.26(eq), indicating that participant transfer activity was 74 percent less than average, with the majority of money moving into equity investments.

Typically, employers discourage daily trading, counseling employees to treat their 401(k) nest eggs as long-term investments. Based on the Hewitt 401(k) Index, most employees appear to be listening, the release stated.

For example, when one of the largest market corrections of recent years occurred (Oct. 27 of last year), the Hewitt Index reading was 4.0(fi), indicating money flowed into fixed income investments. On that day, just under 1 percent of 401(k) Index participants transferred 0.2 percent of the money represented by the index.

"The level of transfer activity on the Hewitt Index compares to the level of daily trading on the New York Stock Exchange," Reinking stated. "It's important to note that even small percentages of the trillion dollars invested in 401(k) plans can be significant enough to affect markets."

The launch of the Hewitt 401(k) Index is the first step of many toward understanding the behavior of 401(k) investors in large plans as a group. In the future, Hewitt hopes to break down the data even further to identify behavioral trends by demographic clusters, such as age and gender.

In addition, the Hewitt Index will help plan sponsors better target the defined-contribution investor with tailored investment education programs aimed at helping them make more informed financial decisions, the company stated.

Background. Hewitt creates the 401(k) Index by capturing the investment activity of a "benchmark" portion of its 401(k) recordkeeping clients, selected as a representative sample of large employers by industry, plan design and investment offerings.

Hewitt currently provides benefit administration and outsourcing services to more than 10 million participants and dependents nationwide.

Hewitt Associates LLC is a global management consulting firm specializing in human resource solutions.

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