First Quarter of 2025 Sees High 401(k) Participant Trading Activity

While retirement plan investors may feel inclined to make changes to their portfolios and trade, in light of the market turmoil over the past few days, experts advise that is still best to “stay the course” and not make any knee-jerk reactions.

Alight Solutions found that volatility in the stock market has already caused high trading activity in retirement plans in the first quarter of 2025, as 0.77% of balances were traded—the highest level since the third quarter of 2020.

Until mid-February, when the S&P 500 reached all-time highs, 401(k) investors favored equities. But, as stock prices have declined, many have shifted their investments to fixed income funds. According to Alight, there was “above-normal” trading activity on 29 of the 60 trading days in the first quarter. The month of March alone experienced higher trading than the entire fourth quarter of 2024.

The asset classes with the most trading were target-date funds, large-cap U.S. equity funds and small-cap U.S. equity funds.

Rob Austin, head of thought leadership at Alight Solutions, says while Thursday may have seemed like a huge shock to investors, it is not abnormal for the stock market to tumble and then rebound in the future. When 401(k) investors see the market fall, Austin says they tend to trade , typically trading out of equities and into fixed income.

“They’re definitely not buying stocks when they’re on sale … and they don’t tend to get back into the market until equities have gone up,” Austin says. “So in other words, … they’re selling low, buying high. Not the perfect recipe for investing.”

Even though trading was relatively high in the first quarter of this year, Austin says less than 1% of participants’ assets have been traded, which indicates that most participants are staying put.

Austin recommends that if participants are not in a target-date fund or a managed account, they should think about rebalancing. Ideally, plans should implement auto rebalancing, he says, which can be done once a quarter. Currently, about 70% of defined contribution plans offer auto rebalancing, but only about 10% of participants actually use it, according to Austin.

For participants who are close to retirement, Austin says, as long as they have not been overweighted to equities, the amount their portfolios have suffered over the last few months has likely been somewhat muted due to derisking along the course of their glidepath.

How Should Plan Sponsors Communicate?

Communicating with the cohort nearing retirement can be difficult for plan sponsors because, while they are not supposed to provide investment advice, they should encourage participants to take a more prudent approach to investing.

“I think plan sponsors are generally trying to get people [who are in] the pre-retirement phase … to think about derisking,” Austin says. “It’s tough to make that message now, because you don’t want people to lock in those losses especially when they don’t have the time to make that up in the next few years.”

Austin adds that the losses investors have experienced are technically only paper losses and that nothing is officially locked in until one makes a trade or takes money out of their account.

Different Generations, Different Reactions

Joe Coughlin, director of AgeLab at the Massachusetts Institute of Technology, says participants ages 55 to 62 are likely going to be the most reactive when it comes to market volatility. In addition, he says many in this cohort likely feel they will need to work longer to make up for losses and that plan sponsors should prepare for employees sticking around longer.

But at the same time, Coughlin believes these workers are going to want more flexible work accommodations if they are working into their later years.

“In fact, what’s kind of ironic is they may start to echo younger workers in a greater way than we’ve ever expected,” Coughlin says. “Everyone was busting on Gen Z and Millennials about [wanting] to work from home, but I think this [older] group is going to react by saying ‘I need to stick around longer to make sure that my wealth span is not shorter than my lifespan, … which means I need a little bit more flexibility.”

With Gen Z and Millennials, Coughlin says these workers may start to lose trust in their employers and institutions and become more skeptical of benefits and retirement plans as the market continues to fluctuate.

“While one generation may be reactive, the other one is taking it to heart and learning,” Coughlin says.