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Markets Rebound, but 401(k) Participants Not Moved to Trade

Industry Trends and Research

As the S&P 500 was posting its best quarterly performance in more than two decades, 401(k) investors were light traders, according to the Alight Solutions 401(k) Index.

The firm reports in its Second Quarter 2020 Observations that there were only six days of above-normal trading activity—a sharp decline from the 29 above-normal days in the first quarter. Half of those days can be attributed to June, which saw a modest uptick in 401(k) trading activity with three days of above-normal activity. 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.

For June, total net transfers as a percentage of starting balance was 0.26%—much higher than 0.11% in May and 0.13% in April, but significantly lower than 0.96% in March, Alight further notes in its June 2020 Observations. Overall net transfers for the second quarter were 0.50% and 1.96% for the year-to-date.  

And continuing with an ongoing trend of investor trades tending to favor fixed income, net trading dollars for 39 out of 63 trading days in the second quarter moved from equities to fixed income. The Index’s 2020 year-to-date data shows 82 out of 125 days favoring fixed income. 

Inflows and Outflows

Trading inflows for the second quarter went mostly to bond funds, which collected 51% of inflows for an index value of $488 million. Following behind were money market funds with 15% of inflows for a value of $146 million and stable value funds at 13% or $127 million. 

As to asset classes with the most trading outflows, target date funds and large U.S. equity funds were nearly equal rounded off at 37% each. The overall index value of outflows was slightly different, with TDFs registering $355 million and large U.S. equity funds totaling $352 million. Company stock was nearly half that at 17% for a total of $162 million.  

After reflecting market movements and trading activity, average asset allocation in equities increased from 65.4% in May to 65.6% in June, the firm reports. Additionally, new contributions to equities increased from 67.2% in May to 67.5% in June.

Market Performance

Alight further observes that the second quarter provided a “respite and recovery from the first quarter’s decline, with all indices gaining.”  

Small U.S. equities (represented by the Russell 2000 Index) rose 25.4%, large U.S. equities (represented by the S&P 500) gained 20.5%, and international equities (represented by the MSCI All County World ex-U.S. Index) were up 16.1%. Additionally, the firm notes that U.S. bonds (represented by the Bloomberg Barclays U.S. Aggregate Index) gained 2.9%. accordingly

Consequently, the second quarter rally has drastically reduced the indexes’ losses for the year. At the end of the second quarter, the S&P 500 Index was down only -3.1%, as compared to -19.6% at the end of the first quarter. Similarly, the Russell 2000 Index was down -13%, compared to -30.6% at the end of the first quarter, and the MSCI All Country World ex-U.S. Index was down -11%, compared to -23.4%.