The Vanguard Center for Retirement Research examined recent transactions and other activities in plans recordkept by Vanguard for nearly 3.5 million active and deferred participants in approximately 2,200 defined contribution plans, and concluded the majority of participants are not trading. For the year through October 31, 2008, only 15% of participants made an exchange in their account.
Vanguard said that participant trading was about seven times higher than normal on Friday, October 10, 2008. However, even though nearly $1 billion in exchanges and more than $400 million flowed on a net basis into fixed income funds on that day, trading for the overall year is not excessively high.
Likewise, Vanguard found no increase in the issuance of plan loans in recent years. In fact, the company said, if adjusted for growth in Vanguard’s recordkeeping business, the relative usage of loans appears to be declining.
Hardship withdrawals, though, have risen in recent years. Withdrawals in the first ten months of 2008 were up 5.1% over the same period in 2007.
The research indicates similar participant activity during these times of market volatility to that during other periods. Vanguard said there are participants who are quitting the market, those who are reducing equity exposure but not to zero, some who are rebalancing, and even participants who are dramatically increasing equity exposure; however, preliminary estimates indicate that less than one-third of participants trading are completely “cashing out.”
In contradiction to the assumption that most participants are experiencing dramatically lower balances, Vanguard found that many participants’ balances have either grown, or fallen slightly, in part because of continuing plan contributions. Through October 31, 2008, 34% of participants experienced rising or flat balances thanks to portfolio diversification and the impact of ongoing contributions, and 10% have seen balances fall by modest amounts ( – 1% to -10%).
Vanguard said participants experiencing larger losses likely include older investors with large balances and significant equity exposure, as well as term-deferred participants who are invested in equities or balanced/life-cycle strategies and have no ongoing contributions.
The Vanguard Center for Retirement Research Commentary is here .