Participants Stay Put Despite Market Declines

According to a Research Note from the Vanguard Center for Retirement Research, 6% of participants made one or more portfolio trades during the first quarter of 2009, while 94% did not trade. The monthly level of trading during the first quarter of 2009 was slightly below the level of trading during 2008, although March 2009 was the third largest trading month in recent years, the report said.

In the first quarter of 2009, traders exchanged about 4% of average defined contribution recordkeeping assets at Vanguard, compared to about 17% for the calendar year 2008. On a net basis, 1% of assets were shifted from equities to fixed income during the first quarter of 2009, according to Vanguard data.

As a result of the market decline and participant trading activity, the percentage of plan assets invested in equities declined from 73% in 2007 to 59% in the first quarter of 2009. Vanguard estimates that approximately 5% of the decline was from participants shifting assets to fixed-income holdings, while the remaining decrease in equity holdings was from declining stock prices.

In addition, contributions to equities fell from 73% of participant contributions in 2008 to 69% during the first quarter of 2009. Vanguard said it observed a similar trend in contributions during the prior bear market (2000 to 2002), but it is less pronounced this time around.

Account Balances Continue to Decline

As a result of declining markets, median and average account balances for Vanguard defined contribution plan participants fell by about 5% during the first quarter, adding to the decline of about 30% in 2008. However, Vanguard contends in its report that the change in overall median or average balances is a misleading indicator of the change in account balance experienced by the typical (median) participant.

When it examined continuous participants—those with an account balance at both the beginning of 2008 through the end of the first quarter of 2009—Vanguard found the median account balance fell by just 17%. More than one-third of participants saw their balances rise or stay flat because of conservative asset allocations, the effect of ongoing contributions, or both, Vanguard said.

Another one-fifth of participants saw their account balances fall by between 1% and 20%. Sixteen percent saw balances reduced by between 11% and 20%, and about three in 10 participants experienced losses of more than 30%.

The Vanguard Research Note is here.