‘Standing,’ Still

Our industry has long fretted over how 401(k) participants will respond to volatile markets. And perhaps not surprisingly, these days the headlines are, generally speaking, full of “stay the course” assurances.   

That said, as recently as a month ago the headlines — even OUR headlines read things like “Light 401(k) Trades in July Even as Wall Street Posts Strong Month, Hot July Brought Cool 401(k) Traders, July Brings Much-Needed Calm to 401k Trading Activity, 401(k) Trading Light in July Despite Market Gains.” As though this is a surprising result.

In fact, as long as I can remember, our industry (or at least its headline writers) has long been somewhat amazed that participants have been as “resilient” in the face of volatile markets as they have—consistently—been over time. We’ve rationalized that ostensibly rational behavior in different ways, at different times. In 1987 (before there was daily trading in 401(k)s) it was said that the markets had come back before participants (via those once-a-quarter transfer windows) had a chance to respond. In 2001-2002, we told ourselves that our brilliant education programs (not to mention the ubiquitous “stay the course” messages) had an impact. In 2007-2008, we comforted ourselves with the notion that there was nowhere (else) to go (granted, that wasn’t really comforting). 

Today — though it’s not really mentioned — I’d like to believe that it has something to do with the shift to professional asset allocation products[1]; target-date funds and managed accounts. After all, haven’t we told participants that the purpose of these platforms was to leave the business of investing to the professionals?

But whatever rationale we may want to apply, the reality has always been that there’s not much trading activity in 401(k) accounts, even during periods of extreme volatility and concern. This is routinely borne out by annual reports from Vanguard and Fidelity, and more frequently tracked (on a monthly basis) by Alight[2]. Inevitably the commentary commends those who “stay the course,” because those who do transfer monies tend to “lock in” their losses, selling low and buying high. Those who do transfer serve as cautionary tales—perhaps even reassuring the participants who, once again, failed to do anything.      

The reality is that participants, generally speaking, aren’t really qualified to make these kind of investment decisions, particularly during periods of extreme volatility. Let’s face it, even the best self-directed investors typically have a day job that doesn’t allow the time or inclination to keep up with the markets, or the trends that underlie them (not to mention that some of those great investing ideas at 10:00 AM fade by the time that fund trading actually occurs at the market close). The advent of daily valuation allowed us to make quick, if not always wise, decisions—but, thankfully, most don’t. 

The bottom line is that while the counsel provided participants during times like these is generally “stay the course”—that counsel is valid only if the course you’re on was correct in the first place. 
 
Footnotes

[1] Indeed, Vanguard notes that in 2021, only 3% of all pure target-date fund investors made an exchange, a rate nearly five times lower than all other investors.

[2] The Alight 401(k) index recorded 7.5 times normal trading on Feb. 22 as Russian troops massed near the Ukraine border, 2.9 times normal trading the next day, and 6 times normal trading on Feb. 24 when the invasion began.  But “normal” is “when the net daily movement of participants’ balances, as a percent of total 401(k) balances within the Alight Solutions 401(k) Index™, equals between 0.3 times and 1.5 times the average daily net activity of the preceding 12 months.” Vanguard’s assessment of 2021 activity is that only 8% of participants traded, and just 4.3% did in 2022 (through June 30) while Fidelity says just 5% did (and 85% of those only did so once). Principal reported 2.44% traded, according to a MarketWatch report.