Looking over 20 years of the Alight Solutions 401(k) Index (formerly the Aon Hewitt 401(k) Index), two major trends have emerged— 401(k) portfolio allocations have changed dramatically, and trading activity has steadily decreased except when market corrections occur, according to an analysis by Alight Solutions.
The analysis finds that in 1997, the asset class with the greatest amount of participant balances was company stock (29%). However, since that time, employers have made changes to curb the amount that flows to company stock. Some have removed company stock as an investment option while others have placed limits on the amount that can be invested in the stock. Nearly all of the companies that match in company stock allow workers to immediately transfer the money to another asset class. As a result of these changes, company stock now comprises less than 10% of 401(k) balances in the 401(k) Index.
On the other hand, in 1997, only 1% of 401(k) assets were in premixed portfolios. Now, target-date funds (TDFs) are the largest asset class in the Index (25%). The reason for this growth can clearly be pinned on automatic enrollment. Since the Pension Protection Act of 2006 (PPA) greenlighted the way for automatic enrollment, employers have steadily been adopting the feature. Moreover, the PPA explicitly paved the way for TDFs to be the default investment fund.
From 1997 to 2017, asset allocations in Large Cap U.S. Equity funds has remained relatively stable. But, allocations to Stable Value funds went from 23% to 11%. This also can be attributed to the PPA and subsequent regulations about qualified default investment alternatives (QDIAs).Causes of trading slowdowns and surges
Participant trading in 401(k) plans has slowed down from 1997 to 2017, but, Alight notes the rise of TDFs is not the sole reason for the trading slowdown. While roughly 70% of investors use TDFs, about half of them have another investment in their 401(k) portfolios. In addition, those workers who are exclusively invested in TDFs have an average plan balance that is much lower than the average balance of those invested in TDFs and other investments. “Ultimately, this means that the fraction of balances in the 401(k) Index that are attributable to investors with only TDFs is fairly small and therefore would not be the primary reason for the decrease in trading activity,” Alight says.
Over the past 20 years, some months stand out for having abnormally high trading activity. Alight found that when markets dropped, trading activity increased. For example, in September 2001, trading activity was suspended for an extended period after the terrorist attacks, and once the markets re-opened on September 17th, the Dow Jones Industrial Average (DJIA) saw its then-biggest one-day loss. By week’s end, the DJIA was down more than 14%. Many 401(k) participants made trades out of equities and into fixed income. “Even after more than 15 years, September, 2001 remains the month with the most trading activity in the history of the 401(k) Index,” Alight says.
However, the 401(k) trading activity for October 2001 was very light. Despite the abbreviated number of trading days in September, the 401(k) Index had net transfers of more than $1 billion for the month (1.4% of balances), but October’s level was only about $135 million (0.2% of balances). October 2001 was a very good month for the markets; by the end of the month, all of the major stock indices had rebounded to their pre-9/11 levels. Alight observed other similar market fluctuations, during which investors were quick to sell when the market dropped, but slow to buy when the market increased.
And, it was not only the markets that caused a surge in participant trading activity. Alight observes that in 2016, there were 28 days of “above-normal” trading activity. Roughly one-third of these occurred in the days leading up to the U.S. Presidential election on November 8. On the day immediately after the election, the net trading activity was 0.10% of balances—about 4 ½ times a normal trading level and easily the highest trading day of 2016.The Alight solutions 20-year analysis may be downloaded from here. A free sign up is required.