Sponsors of 401(k) plans have not faced much participant panic amid the market volatility. But some participants have shifted assets into fixed income from asset classes with higher short-term risk profiles.
“The volume is about 18 percent below the peak of the crisis in 2008,” says Michael Falcon, J.P. Morgan’s head of retirement for the U.S. and Canada. “We are not seeing a lot of panic.” The fact that more participants now have money in target-date funds and managed accounts helps, he says, as those portfolios already contain diversified investments. Participant inertia, that longtime curse and blessing of 401(k) plans, also helps. “Inertia is your frenemy,” Falcon says of sponsors. “If people are engaged in the right behavior, you want inertia to be your buddy.”
Aon Hewitt has seen trades by 401(k) participants increase in the past couple of weeks, but that compares with a low baseline on a typical day. “Most participants did not do anything,” investment consultant Winfield Evens says. On average, just 16 percent of plan participants make a change during a given year.
The increase in 401(k) trading volume started toward the end of July, as the debt ceiling debate heated up, Evens says. By August 8 the activity level was seven times as high as the baseline. “On all the high-frequency days except for one, the direction is into fixed income,” he says.
Aon Hewitt data on investment moves by participants in the 401(k) plans it handles shows that on Monday, 25 percent of the money they transferred came from large-cap U.S. equity funds, followed by lifestyle/premix funds (including target-date funds and target-risk funds) at 20 percent and small-cap U.S. equity at 18 percent. They most often moved into guaranteed investment contract (GIC) and stable-value funds, which together got 72 percent of the money transferred.
“We are seeing some movement from fund to fund but not a lot of de-investing,” J.P. Morgan’s Falcon says.
Employers that proactively launch a participant-communications campaign about the current market turmoil risk creating panic where little exists. “At this point, other than making information available to participants who ask, I would be reluctant to push out a bunch of communication at the participant level, which could increase fear,” Falcon says.
Still, in the past week plenty of worried 401(k) participants have asked J.P. Morgan about what to do with their investments, and sponsors likely face similar questions. “We do not answer a question about where the market is going. We try to bring the discussion back to the fundamentals: Living in retirement is a long-term goal with a long-term investment horizon,” Falcon says. “Do not make decisions about a 20-, 30- or 40-year investment need based on one or two or eight days of the Dow Jones — which, if you are diversified, is only one part of your portfolio.”
Asked for his advice to 401(k) sponsors on what to tell participants about their investments right now, Aon Hewitt’s Evens says: “We encourage you and your staff to all be singing from the same page of the songbook. The bottom-line message is that participants have to ensure that they have an asset allocation that works for the long term and also allows them to sleep at night during choppy times.”
