Retirement Plan Investors Remain Cautious in December Amid Market Volatility

Trading activity stayed subdued last month, with only two above-normal trading days recorded.

Retirement plan investors were generally light traders in December, according to data from the Alight 401(k) Index. Despite a volatile market environment, there were only two above-normal trading days during the month.

One of those days was December 18, when the Federal Reserve announced an interest rate cut, but also signaled a potential slowdown in further cuts; major stock indices tumbled by more than 2.5%. On that day, net trading activity surged to over five times the typical daily volume, reflecting heightened investor reaction to the market downturn.

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In December on average, just 0.011% of 401(k) balances were traded daily. Equity funds were the preferred choice for traders on 14 of the 21 trading days in the month.

The data highlights a trend of relative investor restraint, with trading activity remaining subdued even amid significant market movements.

According to Rob Austin, head of thought leadership at Alight Solutions, trends from Alight’s 401(k) Index year-end data can impact retirement planning in several ways:

  1. Increased Trading Activity: Advisers need to be prepared for higher participant engagement and potential market volatility, which may require more frequent portfolio reviews and adjustments.
  2. Contribution Patterns: The continued popularity of target date funds for contributions indicates that many participants prefer an easy set-it-and-forget-it approach. However, TDFs had the most outflows, indicating that perhaps they are not the best portfolio long-term. Advisers should ensure TDFs are appropriate for their clients’ retirement timelines and risk tolerance.
  3. Market Performance Influence: Strong equity market performance might lead to overconfidence in stocks. Advisers should remind clients of the importance of diversification and not chasing past performance.

“Overall, these trends highlight the need for personalized advice and proactive management to help people optimize their retirement savings and navigate market changes effectively,” Austin says.

Funds receiving the most inflows included bond funds, large-cap U.S. equity funds, and international equity funds. Conversely, target date funds, stable value funds, and emerging markets funds experienced the largest outflows.

Asset classes with most trading inflows in December

Percentage of inflows

Index dollar value ($mil)

Bond funds

36%

$154

Large U.S. equity funds

19%

$79

International equity funds

18%

$76

 

Asset classes with most trading outflows in December

Percentage of outflows

Index dollar value ($mil)

Target date funds

75%

$316

Stable value funds

19%

$79

Emerging markets funds

5%

$23

 

Following market movements and trading activity, the average equity allocation fell slightly from 72.7% in November to 72.4% in December. Meanwhile, new contributions to equities edged up from 69.3% in November to 69.5% in December.

Asset classes with largest percentage of total balance at the end of December

Percentage of inflows

Index dollar value ($mil)

Target date funds

31%

$82,908

Large U.S. equity funds

30%

$79,608

Company stock funds

7%

$18,483

 

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