401(k) Traders Favor Fixed Income, but Still Bullish on Equities

With the markets taking a beating throughout much of 2022, 401(k) investors apparently sought the safety of fixed income through their trading activity, yet equities were still very much in demand, according to the Alight Solutions 401(k) Index.

The firm’s 2022 observations show that 184 out of 251 trading days — or 73% — favored fixed income. Still, net trading activity for the year was only 1.27% — which is higher than 2021’s level of 0.53% but lower than 2020’s level of 3.52%, according to the index, which tracks the 401(k)-trading activity of over 2 million people with more than $200 billion in collective assets.

There were 41 days of above-normal activity, compared to only three in 2021, but 47 in 2020 when the pandemic hit, and the market was perhaps even more volatile. 

“Throughout the more than 25-year history of the 401(k) Index, we have seen people increase their trading activity when stocks drop—a trend that continued in 2022,” said Rob Austin, head of research at Alight. “More than three-quarters of the above-normal trading days (33 out of 41) happened during the first half of the year when the markets were down by 20%. Trading slowed in the second half as Wall Street tried to rally.” 

In fact, there were only three above-normal trading days in the 4th quarter, and no above-normal days in December, which was the second lightest trading month in 2022.

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 Index equals between 0.3 times and 1.5 times the average daily net activity of the preceding 12 months.

Stable value funds made up the lion’s share of asset classes with the most trading inflows in 2022 at 76% for an index value of $2.5 billion, followed by money market funds (15% or $503 million) and bond funds (8% or $254 million). 

Asset classes with the most trading outflows included target date funds, comprising 53% of outflows for an index value of $1.8 billion, followed by large U.S. equity funds (16% or $541 million) and company stock (12% or $405 million).  

Meanwhile, despite the trading days mostly favoring fixed income, 401(k) investors remained bullish on equities with most contributions going to target date funds and large cap U.S. equity funds. Overall, target date funds received 47% of contributions for an index value of $4.9 billion, large U.S. equity funds received 21% or $2.2 billion, followed by international funds at 7% or $762 million. 

Also note that equity losses resulted in 401(k) investors ending 2022 with 68.2% of their portfolio in equities compared to 70.7% at the beginning of the year. Fixed income, meanwhile, comprised 31.8% of portfolios compared to 29.3% at year-end 2021.