In 2020, 401k investors were busy traders out of equities as stocks were falling and slowly returned to them after their rebound.
This unfortunate behavior is shown in the recently released full-year 2020 observations of the Alight Solutions 401(k) Index, which found net transfers for the year as a percent of balance was 3.51%, the highest level since 2008.
The year had 47 days of days of above-normal activity, with 26 of these days occurring during a six week stretch from the end of February to early April when the world was coming to grips with the COVID-19 pandemic.
A “normal” level of relative transfer activity, per Alight Solutions, is when the net daily movement of participants’ balances as a percent of total 401k 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, while a “moderate” day is when the movement is between 1.5 and two times the average.
“In some ways, there was a full market cycle in 2020. There was a steep drop in March followed by a sustained recovery throughout the remaining months of the year. Unfortunately, we saw many investors repeat the unfortunate trend of selling low and buying high that has been shown repeatedly throughout the more than 20-year history of the Alight Solutions 401(k) Index,” said Rob Austin, head of research at Alight Solutions. “The busiest days for trading were when the stocks were tumbling, and the trades overwhelmingly went from equities to fixed income. It wasn’t until the end of the year—when the market was setting new record highs—that investors traded back into equities.”
Target Date Funds received 46% of contributions in 2020, followed by large U.S. equity funds (20%) and international funds (7%).
After reflecting contributions, trades, and market activity, 401k investors ended 2020 with 67.7% in equities, down slightly from 68.1% at the beginning of the year. That left fixed income with the remaining 32.3%, up 0.4%.
Q4, December observations
401k investors resumed trading into equities in the fourth quarter, according to the index’s Fourth Quarter 2020 Observations. Twenty days in the quarter saw net trading activity move money from fixed income to equities—much higher than the six days in the third quarter. Overall net trading volume was light with 0.68% of balances traded (down from 0.92% in the third quarter).
All the days that favored equities were in November and December. The 10 days of above-normal activity in the fourth quarter were more than the second and third quarter combined.
The fourth quarter was positive across all observed indices. Small U.S. equities (represented by the Russell 2000 Index) rose 31.4%, international equities (represented by the MSCI All Country World ex-U.S. Index) grew 17%, and large U.S. equities (represented by the S&P 500 Index) gained 12.2%. U.S. bonds (represented by the Bloomberg Barclays U.S. Aggregate Index) also rose 0.7%.
In December specifically, the index found 401k investors were content to watch their balances grow. Trading was light as Wall Street indices rose to record levels. There were no days of above-normal activity and trading days were evenly split between those favoring equities vs. fixed income funds.
Average net trading activity was 0.015% of 401k balances, the lowest monthly level in 2020. Eleven days favored equity funds and 11 days favored fixed income funds.