DC Participants Get Jumpy on Equity Holdings

Aon Hewitt tracks 401(k) account activities of nearly 1.3 million participants through the Aon Hewitt 401(k) Index. Rob Austin, director of retirement research at Aon Hewitt, tells PLANSPONSOR that the first 13 days of October brought five days of “moderate” or “high” trading activity. To put that in perspective, from January through September 2014, there had been only 12 total “moderate” or “high” trading days among 401(k) plan participants.

“Up until this point 2014 was shaping up to be an incredibly light trading year overall,” Austin says. “Then all of a sudden in the first few weeks of October we saw five days that came in above normal. What was going on? It’s due to the stock market swings, that much is clear.”

Indeed, the highest trading days for 401(k) participants so far in October have clustered right on and after the days when the S&P 500 lost 1.5% or more. When individuals were making trades, they tended to move from equities and into fixed income, the index shows.

Austin says he is not surprised that the biggest trading days came right after stock market drops, nor that participants favored fixed income on the days when trading volume came in above normal levels.

“We experienced a few daily declines of around 2% so far in October, and clustered right around those days we saw a lot of activity—people were clearly saying, ‘Get me out of here, I don’t want to be in this volatile market,” Austin observes. “For the most part they are selling equity and buying fixed income.”

Strikingly, this participant behavior runs counter to much of the advice being shared by investment professionals and consultants heading in to the end of 2014. Russell Investments, for example, just published its fourth-quarter 2014 global investing outlook, which provides updated strategy and guidance for multi-asset portfolios via Russell’s global team of investment strategists.

While investors are currently experiencing the third-oldest bull market in the past 50 years, Russell’s strategists say we are not likely to face a major turning point in the near future. They maintain the core investment strategy views stated originally in their 2014 Annual Outlook—characterized by a moderate preference for equities over fixed income, a liking for credit, and a bias against exposure to rising long-term interest rates.

Russell researchers admit that volatility has been increasingly recently based on geopolitical events and concerns about slowing global growth, especially in Europe and other non-U.S. markets, but it has not been enough to derail an equity preference for individual investors or institutions. Against this backdrop, Austin says it is clear that some 401(k) participants are letting their emotions get the better of them when it comes to setting and executing long-term investing goals.

He says the Aon Hewitt index shows participants’ growing worries about potential equity losses are resulting in increased and potentially inappropriate allocations to fixed income. For example, looking at October 14, when the S&P 500 went down 1.65%, about 90% of trades executed the following day were to fixed income, Austin says.

“It’s usually the case that when we see something like a 2% drop or more in the equity markets, a vast majority of trades placed the following day are moving from equities over to fixed income,” Austin explains. “We also find that after the stock market goes up a little bit, we see a propensity for people to move more into equities. It’s not nearly at the same volume, but we do see an uptick.”

This means that participants are being reactive to the markets, Austin says.

“Ultimately it’s a harmful behavior—they’re basically selling equity after it’s reduced and buying equity after it’s gone up,” Austin explains. “So that’s really just the old adage of buying high and selling low. That is self-defeating behavior to some extent.”

The phenomenon is as unfortunate as it is dependable, Austin adds.

“We have found consistently over time that, whenever we see a market correction and stocks start to lose some ground, people in 401(k)s tend to be more active and they tend to move towards fixed income,” Austin says. “This is not surprising, but it is something that we are somewhat disappointed to see whenever there is a bit of a pullback from Wall Street.”