Volatility drives stock market fears in 401(k) plans

Market swings early in the year spooked investors, driving higher trading activity and poor decision-making as participants fled equities in search of safe-haven investments. Participant trading activity in January 2016 reached a three-year high, and 82 cents of every dollar traded moved from equity instruments to fixed-income funds, according to data from Aon Hewitt, a large record keeper with about 2.5 million 401(k) participants. U.S. stocks had their worst January since 2009, after a selloff that saw the S&P 500 tumble 5.1% on the month. That volatility led participants to make a “knee-jerk reaction,” according to Rob Austin, Aon Hewitt's director of retirement research. In an average month, equity and fixed-income trading in current account balances tends to be about 50-50. “The fact it's much higher going from equities to fixed income speaks to the fact that the markets didn't do well,” Mr. Austin said. Trading activity was up markedly in January, with 0.39% of balances traded in the month, the highest level since January 2013. The figure is small in terms of an absolute percentage of overall participant balances, but is high in a relative sense, Mr. Austin said. “The vast majority of individuals probably didn't do anything in January. But when we look at a normal month, it is much higher,” he said. In December, for example, participants traded 0.14% of balances. Target date funds saw the most outflows, at 39% of all outflows, or $251 million. It's natural a large portion of outflows would be coming from TDFs, given their popularity and high inflows to the funds, according to Mr. Austin. But the behavior also runs counter to the value proposition of TDFs, which are meant to house the entirety of investor assets and shield investors from some of the poor decision-making they may otherwise exhibit, Mr. Austin said. Aon Hewitt data is based on its 401(k) Index, which tracks approximately half of the record keeper's participants. Even if investors didn't make account trades, the market volatility still spooked them enough to call plan providers and access their mobile and online accounts in droves. Spikes in volume correlated to the days when the market experienced the biggest drops, according to spokesman Bill Sutton. On Jan. 4, for example, calls to Voya and participant web and mobile logins were about 40% higher than average January volumes; mobile logins also swelled 35% on Jan. 20. Further, 4 million people on Jan. 4 contacted Fidelity Investments by phone or online, an intraday record for the firm, the largest record keeper in the defined-contribution market.