Money Markets Experience Highest 401(k) Investment Inflows in October

Investors moving assets within their 401(k) plans last month sought safety in fixed income amid stock market declines, according to the Alight Solutions 401(k) Index released Monday.

When tracking investment moves within its recordkeeper database, Alight found that traders favored fixed income on 14 of 22 trading days in October, with money market funds seeing the most inflows by far (56%), followed by international equity (13%) and company stock (12%).

“We can’t say for certain why individuals make trades. However, we know from the 25-year history of the Alight 401(k) Index, that people tend to trade into fixed-income funds when stock prices fall,” Rob Austin, head of research at Alight Solutions, said via email. “With October’s S&P 500 returns in the red, it isn’t surprising to see money market funds receiving net inflows.”

Austin noted that, unlike other parts of the investment market, interest rates are not the most influential factor affecting how investments will start moving if rates are expected to hold, or even fall, in 2024.

“Alight’s 401(k) Index started in 1998 and, since that time, we have found that stock market returns tend to be a bigger predictor of trading activity than interest rate movement,” he said. “Specifically, trading activity spikes when indices like the S&P 500 and DJIA fall significantly in a day.”

In terms of outflows, target-date funds (57%), mid-cap U.S. equity (20%) and small-cap U.S. equity (13%) saw the most departures, Alight found. New contributions to equities decreased slightly to 68.8% in October from 68.9% in September.

“The 401(k) Index shows only trading activity and does not reflect money leaving plans, so this is money traded to other investments,” Austin stated. “Because target-date funds receive the lion’s share of new contributions (51%) and are the largest asset class in the index (31% of balances), it is ripe for money flowing out.”

Moreover, Austin said that due to automatic enrollment, many participants are defaulted into the target-date funds. When these people change their investments, the money will inherently come from TDFs.

Overall, October trading was light, with just one above-normal day, Alight found. A “normal” level of relative transfer activity is when the net daily movement of participants’ balances, as a percent of total 401(k) balances within the Alight Solutions 401(k) Index, equals between 0.3 times and 1.5 times the average daily net activity of the preceding 12 months.

A “high” relative transfer activity day is when the net daily movement exceeds two times the average daily net activity. A “moderate” relative transfer activity day is when the net daily movement is between 1.5 and 2 times the average daily net activity of the preceding 12 months.

Alight tracks 401(k) trading by following trading activity of the 401(k) plans it administers for several large employers, said Austin. This forms the basis for Alight’s 401(k) Index; the firm does not necessarily know when an individual has somebody else trading on their behalf.