What Do TDF Trends Tell us About Transfer Trading in 2016?

A new report suggests that at least some of the diminution in participant transfer activity can be attributed to the prevalence of target-date funds.

According to the Aon Hewitt 401(k) Index, there were 28 days of above-normal daily transfer activity in 2016 – slightly less than the trailing 5-year and 10-year averages (32 and 35 days, respectively). That said, nearly one-third of the above-normal days of trading occurred in the weeks leading up to the presidential election. For 2016, a net total of 2.13% of balances traded – slightly higher than the trailing 5-year average (2.02%), but below the trailing 10-year average (2.59%). 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.

The report suggests that that reduced volume might be at least somewhat connected to the growing prevalence of target-date funds – as they did in 2015.

Target-Date Trends

Indeed, the percentage of assets invested in target-date funds continued to climb in 2016, with TDFs representing 24.1% of total assets as of year-end, up from 23.1% at the end of 2015 and only 16.5% of the assets in the Index in 2011. Roughly 4-in-10 contribution dollars flowed into target-date funds in 2016 (ironically, though perhaps a result of their prevalence as default investments, TDFs were the third-highest asset class outflow, at 13%). The Aon Hewitt 401(k) Index tracks the 401(k) trading activities of nearly 1.3 million participants, representing nearly $160 billion in collective assets.

In 2016, stable value funds, which captured 47% of the fund inflows tracked by the index, drew most of the incoming transfers, with bond funds (30%) drawing the second-most, followed by money market funds (30%). In general, participants tended to trade into fixed income funds from equity instruments in 2016.

Company stock suffered the largest outflows (42% of the total), followed by large U.S. equity funds (28%). The first 10 months of the year heavily favored fixed income, while November and December favored equities.

December was a light trading month for investors in DC plans, according to the Aon Hewitt 401(k) Index – a sharp contrast to November, which saw the highest trading activity in over three years. There were, in fact, no “above-normal” trading days in December. On average, 0.017% of balances traded each day and when participants made trades, they favored equities over fixed income funds, according to the Aon Hewitt report.

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