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Market Volatility Creates Uptick in 401(k) Trading Activity

December’s market volatility capped off a year in which 401(k) investors started off flocking to equities, only to later flee them for fixed income.

According to the Alight Solutions 401(k) Index, 2018 was an interesting year for trading activity among 401(k) investors, as 18 of the first 28 trading days were above-normal with nearly universal movement from fixed income investments to equity funds. By December, however, investors reversed this trend, when Wall Street experienced a roller coaster ride.

Overall, the 2018 trading activity appears to be somewhat of a wash. Alight explains that, on the one hand, participants were very active during the year, with 46 days of above-normal daily transfer activity, which marked the highest number of above-normal days in the last five years and was much higher than the 13 days of above-normal trading in 2017.

Yet, on the other hand, net trades in 2018 amounted to only 1.42% of total plan balances, making 2018 a record low year for trading activity in the over 20-year history of the index.

“This apparent discrepancy is attributed to the fact that many of the high trading activity days were concentrated around the beginning of the year and toward the end of the year, with the trades moving in opposite directions,” Alight states.

Seven-Day Stretch

During the seven-day stretch in December when the Dow dropped by at least 350 points on six occasions, every day was an above-normal day with money shifting from equities to fixed income, essentially cancelling out the actions from the beginning of the year.

The fourth quarter of 2018 overall had 17 days of above-normal trading activity, mostly concentrated around days when the stock market lost ground, which was a sharp contrast to what was a record slow third quarter. Since the inception of the index in 1997, there have been only seven quarters with more than the 17 days of above-normal trading activity, Alight notes in its fourth quarter observations.

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 Alight Solutions 401(k) Index equals between 0.3 times and 1.5 times the average daily net activity of the preceding 12 months.

Inflows and Outflows

As for 2018 trading outflows, target date funds comprised 53% ($1.545 billion) of the total, followed by company stock at 22% ($648 million) and large U.S. equity funds at 13% ($368 million). Stable value funds, meanwhile, made up the lion’s share of trading inflows in 2018, comprising 56% ($1.628 billion) of the total, followed by money market funds (19% at $542 million) and bond funds (13% at $392 million).

Not surprisingly, TDFs collected the majority of contributions in 2018 at 46% for nearly $6.6 billion, followed by large U.S. equity funds (20% at $2.8 billion) and international funds (8% at nearly $1.15 billion).

After reflecting contributions, trades, and market activity, 401(k) investors ended 2018 with 66.6% in equities, down from 68.6% at the beginning of the year, while fixed income finished the year with 33.4%, up from 31.4%, representing a 2% swing for both asset classes, the report shows.