Web Access Boosts 401(k) Trading

November 16, 2000 (PLANSPONSOR.com) - Plans that provide Internet access to participants may experience a dramatic increase in trading volumes - in some cases more than doubling the number of participant trades, according to a new Hewitt study.

The research found that average portfolio turnover increased by more than 50% after the introduction of the Internet as a trading channel, and that the number of trades made by participants nearly doubled.

One company in the study (company “Alpha”) projected average annual turnover increased from 84% prior to the Internet introduction to 121% thereafter.  At another firm in the study (company “Omega”) projected average annual turnover soared from 48% to 79% after introduction of the Web trading channel.

Market Timers

The projected portfolio turnover levels are consistent with significant portfolio reallocations by the average 401(k) plan participant during the time period studied, suggesting that participants are not simply interacting with the plan by rebalancing their portfolios, but potentially reacting to the market and market timing, said Hewitt.

The study also found that younger and highly paid participants are more likely to use the Internet for trades than their older and less-highly paid counterparts.

The study found that an increase in portfolio turnover makes it critical for plan sponsors to educate participants and discourage poor investment habits, such as market timing, or investing based on attempts to predict future market direction.

Picking and Sticking

Of the more than 15,000 participants who used the Internet to make a trade during the study period, 88% who made a second trade used the Internet channel. Of that group 94% who made a third trade did so via the Internet, as did 96% of those who then made a fourth trade.

“One benefit of offering Internet access is that participants become more comfortable using and interacting with the plan,” said Lori Lucas, defined contribution consultant, Hewitt Associates.  “At a minimum, though, these high turnover figures suggest that the average participant isn’t ‘picking and sticking’ with their 401(k) plan allocations.”

“It’s imperative that plan sponsors take advantage of the Internet channel as a tool to communicate and educate participants about the importance of taking a long-term investment strategy with their 401(k) savings,” Lucas continued.

Hewitt conducted the study, in conjunction with faculty and researchers from Harvard University and the Wharton School of the University of Pennsylvania.

The study examined the trading behavior of more than 60,000 401(k) participants at two U.S. companies that added Internet access during a nearly 3-year time period (approximately 18 months before Internet access was introduced and 18 months after the Internet introduction.)