401(k) investors dump equities after market sell-off

Personal Finance


When market volatility is high, financial advisors often suggest investors review — and possibly re-balance — their portfolios rather than make an emotional or impulsive move.

Yet as the stock market plunged at the beginning of this week, trading activity in 401(k) plans skyrocketed. And, data show that many investors moved money out of equity funds in accounts and into fixed income.

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Daily trading activity in 401(k) plan accounts was four-to-six times above average on Monday and Tuesday, according to Alight Solutions, which tracks 401(k) retirement plan activity at large employers. The firm’s research found the majority of asset transfer outflows came from U.S. large cap equities and target date funds, while the majority of inflows were into stable value, bond and money market funds.

Retirement plan investors seems to be repeating a pattern that often occurs when the markets are volatile.

“When there is a deep decline in stocks on Wall Street, people take a reactionary tone and sell off stocks pretty quickly,” said Rob Austin, vice president of research at Alight. “This was the highest level of trading activity we’ve seen since February 2018.”

Investors who are near retirement may want and need to take some of the risk off the table and adjust their stock allocation after strong gains in 2019, according to Wade Pfau, professor of retirement income at the American College of Financial Services.

However, he points out that “if you’re three to five years away from retirement, a target date fund is already going to be less aggressive” option.

“It will generally be around 30% to 50% allocated to stocks and the rest is fixed income,” he said.

Pfau agrees with most financial advisors who suggest investors who are far from retirement, 10 or 20 years or more, should stay the course with their financial goals and investments.

“If you’re in a position where you’re not anticipating needing that money, you have a long runway for the market to recover,” he said.

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Alight Solutions tracks 401(k) trading activity of large employers’ plans, totaling more than $200 billion in assets. More than half of those overall 401(k) assets tracked by Alight are in equities: target date funds and U.S. large cap equity funds.

Meanwhile fewer than 20% of assets are in stable value and bond funds — and only 1% of total 401(k) assets are in money market funds.

Looking for long-term gains, investors in 401(k) plans are more heavily allocated to equities, but had started to take some profits off the table at the end of 2019, Austin said. Investors were siphoning a little bit of money at that time but the level of trading activity has soared over the past two days.

“The fact that these moves are happening on these days when the stock market is dropping shows you it’s not just siphoning profits, it is a reactionary move,” Austin said.

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Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.



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