Retirement Investors Rebalanced 401(k) Portfolios in May

U.S. stocks remained strong in May, but 401(k) plan participants opted to take a disciplined portfolio approach, according to Alight Solutions’ latest 401(k) index update.

Trading activity increased modestly in May, with four trading days of above normal volume. Still, 0.16% of assets were transferred—cautiously.

“After a strong month for equities, participants trimmed equity exposure and redirected flows into fixed income,” Alight’s wealth portfolio leader, Chris Farmer, wrote in an emailed response to questions. “That kind of movement is consistent with rebalancing, where rising stock values naturally lead investors to lock in gains and bring portfolios back in line with target allocations.”

In May, 16 of 20 days recorded net flows into fixed income. Net trading inflows were allocated overwhelmingly to bond funds (60%), with some distribution to emerging markets (15%) and stable value (12%). Almost half of outflows came from large-cap U.S. equity (49%), while company stock (28%) and small-cap U.S. equity (8%) also saw net trading outflows.

“There’s always some risk that rebalancing can look like getting defensive too early if markets continue to move higher,” Farmer wrote. “However, with markets softening in June, those May reallocations may prove beneficial in hindsight.”

Despite some near-term rebalancing, long-term behavior remained consistent.

“Participants are making tactical adjustments through trading, but their core savings strategy remains unchanged,” Farmer wrote. “That balance between short-term rebalancing and long-term commitment is exactly what you want to see.”

Contributions to 401(k) plans continued to flow primarily into equities, with target-date funds accounting for the largest share of contributions. After reflecting market movements and trading activity, the average asset allocation to equities increased to 74.2% in May, up slightly from 73.9% in April.

Alight reported that 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 company’s index, equals between 0.3 times and 1.5 times the average daily net activity of the preceding 12 months. An “above normal” relative transfer activity day is when the net daily movement exceeds 2 times the average daily net activity. A “moderate” relative transfer activity day is when the net daily movement is between 1.5 and 2 times the average daily net activity of the preceding 12 months.