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Data & Research October 8, 2024
401(k) Traders Shifting to Fixed Income
There is a ‘rebalancing’ happening after four consecutive quarters of a lean toward equity investing, according to Alight data.
Reported by Alex Ortolani
A strong streak of equity investing among 401(k) investors has cooled, as of the end of September, according to data from the Alight 401(k) Index released Monday.
After four months of steady growth toward equity allocations in retirement plans, Alight saw a decrease in focus to 72.2% in September from 72.9% of investment in August. Meanwhile, fixed-income funds saw net inflows on 18 of the 20 trading days last month, with bond funds leading at 45% of transactions.
“I think a lot of it has to do with rebalancing with a shift to fixed income, bonds, stable value and money market,” says Rob Austin, head of thought leadership at Alight, though he also notes that trading overall was “relatively light.”
Austin says investors may have been in “profit-taking mode” after seeing how equities performed, while also dealing with some volatility, which often leads 401(k) investors toward fixed-income safety.
Alight also reported inflows into safer money market funds at 27% and stable value funds at 26%.
In contrast, large U.S. equities saw outflows of 36%, and company stock saw outflows of 26%.
Overall, trading activity for the index was light in September, with just two days above the normal amount.
After hiking interest rates in recent years to combat inflation, the Federal Reserve finally started what is expected to be a rate-cutting regime on September 18.
Austin does not see the change in 401(k) trading as a reaction to the rate cut or to the potential for further rate cuts. He says he would not be surprised, however, if market volatility related to the U.S. elections in November has this group of investors moving further to safer assets.
“Volatility has always spooked 401(k) investors,” he says. “When the market drops, people will trade, and when they trade, they will go to fixed income.”
In this regard, the close U.S. presidential elections may “drive a little bit of fear based off of volatility,” particularly if there are large drops in the S&P 500 and Dow Jones Industrial Average.
Alight’s 401(k) index tracks the trading behavior of more than 2 million retirement plan participants.