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Volatility Cast a Big Shadow in February

Most participants may have ridden out the recent market volatility – but participant transfers perked up in February – and target-date funds loomed large on the outflows list.

The month got off to a fast start, with activity tracked by the Alight Solutions 401(k) Index™ showing trading on Monday, Feb. 5 nearly 12 times the “normal” level of trading. Alight notes that the last time trading occurred at that level was in August 2011, coinciding with the last time the S&P 500 saw its biggest single-day drop.

For the month as a whole, the Alight Solutions 401(k) Index found that nine of the 19 trading days in February had above-normal trading activity, with the majority occurring in the wake of the market downturn at the beginning of the month. Trades were split between equities and fixed income as investors jockeyed with the market, but the majority of trading dollars flowed from equities to fixed income funds. A “high” relative transfer activity day is when the net daily movement exceeds two times the average daily net activity in the Index, which tracks the 401(k) trading activities of nearly 1.3 million participants representing nearly $160 billion in collective assets.

Last year was the slowest trading day for participants in two decades – though things heated up in the fourth quarter of 2017. For 2017 as a whole, the percentage of assets invested in target-date funds grew in 2017 from 24.1% at the beginning of the year to 27.2% by the end of the year. Much of that growth, in turn, can be attributed to the fact that TDFs received the lion’s share of new 401(k) contributions: Last year, 43% of contributions were directed to TDFs.

Most of February’s transfers (58%) went to stable value funds (some $354 million), followed by flows into money market funds (17%) and bond funds (11%). But while a plurality (36%) of that flow came from large U.S. equity funds, more than a quarter (29%) was pulled from TDFs.

Muting that impact was the reality that a strong plurality (43%) of new contributions in February went into TDFs – some $667 million – more than double the $291 million (19%) of new contributions that went to the second most popular category – large U.S. equity funds – the category from which transfer flows during the month were strongest.