When Markets Get Cold, Many Participants … Do Nothing

That was the key takeaway from a new research report from the Vanguard Center for Retirement Research, “Inertia and retirement savings: Participant behavior in 2008,” in which Vanguard researchers analyzed data from DC plans to which it provides recordkeeping services.

During 2008, 16% of participants in Vanguard-recordkept plans traded in their accounts while 84% did not. On a net basis, traders shifted 4% of assets to fixed income in 2008, but participants were moving both into and out of equities on any given trading day, the Vanguard data showed.

Two percent of active participants abandoned equity holdings completely in 2008. While account holdings of equities fell in 2008, participant contributions to equities remained essentially unchanged from 2007 at 73% of contributions. Vanguard said the equity allocation reflects the growing influence of balanced funds including target-date offerings.

The fact that DC participant activity during the height of economic disturbance was comparatively low proves that a key participant motivator is still as powerful as ever, the researchers asserted.

“These findings again demonstrate the persistence of inertia as the dominant decisionmaking approach in retirement savings,” the researchers wrote. “In response to exceptional market circumstances, most participants chose the path of least resistance and did nothing in 2008.”

Inertia Does Not Mean Uncaring

Other forms of plan activity were similarly relatively quiet in 2008, Vanguard said. For example, the number of participants taking loans from their DC plan accounts declined 12% in 2008 and nonhardship withdrawals were up a modest 1% in 2008.

Despite the data supporting the notion of continuing participant inertia, the Vanguard researchers cautioned sponsors about misreading that as participants being uncaring about their economic situation.

"Although they may not be taking action, participants may still be worried or fearful about their retirement savings, the economic outlook, and the market environment," the researchers wrote. "They can still benefit from reassurance in the form of frequent communications and outreach, even if their likely response is to do nothing."

The study covered more than 3.2 million participants holding 3.5 million accounts in more than 2,200 DC plans. The study report is available here.