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2012 401(k) Index™ Comments| Aon

Aon Hewitt 401(k) Index™ Observations 2012
Index Comments


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  • 2012 proved to be another volatile year for capital market participants. As employment and housing numbers continued to improve, investors were generally optimistic throughout the first quarter leading to strong gains in the equity markets. Fears over the European debt crisis took hold during the second quarter, sending volatility higher and equity prices lower. The third quarter saw investors become more positive and volatility decrease as resolutions to the crisis emerged from overseas and various economic reports showed the U.S. economy continuing to improve. Concerns over the fiscal cliff and its impact on the future growth of the U.S. economy dominated the fourth quarter (particularly December) in what proved to be yet another volatile period for equity investors. Overall, investors who remained committed to the capital markets throughout the year generally experienced gains in both their equity and fixed income investments.
  • Participants continued to favor fixed income investments for most of 2012, transferring heavily out of equities, according to the Aon Hewitt 401(k) IndexTM. Over half of the outflows from equities came from company stock funds, but even if company stock is excluded, equities decreased by a sizable $767 million from participant transfers.
  • The first quarter had strong market gains, and equity transfers followed suit as participants moved $562 million (net) into diversified equities. In the second quarter, transfers reversed direction moving back towards fixed income by nearly the same magnitude. The fourth quarter had $583 million in outflows from diversified equities. For the year, including company stock, $2.12 billion was moved into fixed income investments, reflecting 1.7% of assets. By comparison, 2011 had $2.48 billion of equity outflows and $1.42 billion in 2010. This year’s volume was very low until after U.S. elections, when transfer activity stepped-up considerably.
  • During the year, a total of 23 days had high transfer activity exceeding the trailing 12-month daily average—nearly half the number of above-normal* daily occurrences found in 2011. The significance is even more astounding considering that only 0.024% of total balances were transferred daily, on average, throughout 2012, far lower than both 2011’s and 2010’s daily averages (0.035% and 0.036%, respectively). On a net basis for the year 1.92% of total defined contribution balances ($2.42 billion) transferred funds, which is significantly below the historical average (2.97%).
  • Despite the strong returns as indicated by the Russell 2000 Index (16.35%), small U.S. equities lost $477 million from participant transfers in 2012. Additionally, large and mid U.S. equities and emerging market asset classes all experienced large participant outflows despite high market gains among these asset classes as well. Among these three, the large U.S. equity class had the next most significant loss, seeing $335 million in total outflows.
  • On the other hand, despite the strong returns of stocks in 2012, fixed income assets captured the majority of the inflows as bond prices also reached record highs. The inflows were spread much more evenly across the three fixed income asset classes than in 2011. Bond funds received $911 million in flows, comparable as an absolute dollar amount to 2011 ($882 million), while GIC/stable value funds gained only $779 million from transfers; sizable, but barely half as much as in 2011 ($1.4 billion). Money market funds gained in popularity over last year, receiving $277 million in flows compared to just $183 million in 2011.
  • The overall asset allocation across asset classes ended the year with 59.4% of assets invested in equities, up from 58.3% at the end of 2011. This ratio peaked in March at 60.6% before slumping to see only small fluctuations the rest of the year.
  • By asset class, substantial asset allocation changes occurred during the year. For the first time since before the financial crisis, large U.S. equity and GIC/stable value funds share the lead as the top holders of 401(k) participant balances—both carrying around 19% a piece. U.S. equities have caught up because of this year’s strong market returns in spite of participant outflows. Not far behind, premixed funds now account for 17.3% of assets, up from 16.5% at the start of the year. Use of company stock funds declined further to the lowest level ever recorded by the Index, now sinking to 11.5% of total assets (after hitting a new low of 12.8% last year).
  • Participant contributions, a reasonable gauge of employee sentiment, tell a story favoring equities, contrary to the story told by transfer activity. By the end of 2012, participant elections in equity investments had grown to 61.7%, up from 59.7% at the start of the year. This allocation level is back up to within a couple of percentage points of highs reached (in 2011) since the 2008 financial crisis.

The following tables show Aon Hewitt 401(k) Index™ statistics and the returns of major market indices for January 1, 2012 through December 31, 2012.

Index Returns

Barclays Capital Aggregate Bond Index 4.22%
S&P 500 16.00%
Dow Jones Industrial Average 9.78%
Russell 2000 Index 16.35%
NASDAQ Index 17.43%
MSCI EAFE Index (Net) 17.32%
MSCI Emerging Markets Index (Net) 18.23%

Index Statistics

Average Yearly Net Activity: 0.024%
Number of Fixed Income Days 163 (65%)
Number of Equity Days 87 (35%)
Number of Above Normal* Days: 23


*A “normal” level of relative transfer activity is when the net daily movement of participants’ balances as a percent of total 401(k) balances within the Aon Hewitt 401(k) Index™ equals between 0.3 times and 1.5 times the average daily net activity of the preceding 12 months. A “high” relative transfer activity day is when the net daily movement exceeds two times the average daily net activity. A “moderate” relative transfer activity day is when the net daily movement is between 1.5 and two times the average daily net activity of the preceding 12 months.

Monthly Details: Aon Hewitt 401(k) Index™ Observations