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Will Hot Markets Stir Participant Trading?

Last year was the slowest trading day for participants in two decades – but things heated up in the fourth quarter.

However, according to the Alight Solutions 401(k) Index, the fourth quarter of 2017 saw moderate trading activity among defined contribution plan investors, with six days of above normal trading activity in the quarter – nearly as many as the previous three quarters combined (seven). During Q4, net transfers for the quarter amounted to 0.51% of balances – the highest level for a quarter in 2017.

But, as for 2017 as a whole, according to Alight Solutions, part of the light trading activity can be explained by the prevalence of target date funds, the largest asset class in the 401(k) Index. The percentage of assets invested in TDFs 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 receive the lion’s share of new 401(k) contributions: last year, 43% of contributions were directed to TDFs.

Strong investment returns also probably contributed to the light trading activity, according to the report, since over the 20-year history of the 401(k) Index, trading activity typically spikes when there is a downturn in the market, according to Rob Austin, head of research at Alight. “In general, 2017 saw the markets steadily rise, so rather than rebalancing, 401(k) investors stayed the course and enjoyed positive market returns," Austin says.

Not that most participants have ever been active traders; in 2017 just 1.45% of total plan balances were traded during the year, down from 2.13% in 2016. There were 13 days of above-normal daily transfer activity in 2017 – fewer than half the number in 2016 (28) and the trailing 5-year and 10-year averages (30 and 32 days, respectively). A “normal” level of relative transfer activity is when the net daily movement of participants’ balances as a percentage 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.

During the course of the year, international funds attracted more than half (54%) of the inflows, with emerging markets a distant second (11%). Bond funds drew 10%.

As for where that money was coming from, the bulk was from company stock (57%), along with stable value (18%) and small U.S. equity funds (16%).