Is Market Volatility Spooking 401(k) Investors?

Recent stock market volatility took some toll on 401(k) account balances in August, according to the Employee Benefit Research Institute.

Pre-retirees with 20 to 29 years of service with their current employer saw their average account balance drop 3.6%.

All demographics tracked by EBRI experienced losses. Older, longer-vested participants, who presumably carry less risk in equities than younger workers, and have larger accounts, were least hurt.

No cohort lost more than 4.2%, the average pull back experienced by workers age 35 to 44 with 10 to 19 years of service to existing employers.

That retirement account balances fluctuate with stock markets should surprise no one.

But when unusual volatility in markets, of the kind experienced several days in August, sparks unusual trading volume in 401(k) accounts, the correlation becomes noteworthy.

Trading activity in 401(k)s on Monday, August 24 was seven times the normal level, and the third highest day of trading volume since 2008, according to Aon Hewitt's 401(k) Index, which tracks the trading activity of 1.3 million participants, representing $160 billion in collective account value.

At one point on the 24^th, the Dow Jones Industrial Average shed over 1,000 points in early trading. It recouped some, and by the end of the day had recorded a 588-point decline.

The previous Friday, on August 21, 401(k) trading was twice the historical average. The Dow fell 531 points that day. On both that day and the following Monday, investors moved assets from equities to fixed income.

Investing Context

Rob Austin, director of retirement research at Aon Hewitt, offered some context.

On a typical day, 0.02% to 0.03%, or two to three basis points, of all the 401(k) assets tracked by Aon Hewitt's index are traded.

On Monday the 24^th, that percentage jumped to 0.17%. "Still a relatively small number," said Austin. "But so much higher than what a typical day would look like."

On balance, Austin is in agreement with a report released last June by the Government Accountability Office, which concluded that market timing, or excessive trading of assets in 401(k) accounts, is not a systemic problem within the defined contribution system.

But last week's unusually high trading activity was enough to catch the attention of some sponsors within the Aon Hewitt universe, according to Austin. Aon Hewitt is record keeper to more than 500 defined contribution plans, covering about 5.7 million participants.

"Sponsors tend to be keenly aware of unusual trading activity," explained Austin. "After a day like Monday [August 24], yes, sponsors do come to us and ask for some talking points, or very basic communications to help remind participants that they are in this for the long haul."

Emphasizing Diversification and Long-Term Results

Steve Gordon, director of retirement solutions at Bogdahn Group, a Florida-based RIA consultancy to sponsors of institutional retirement programs, said the subject of recent market volatility is a conversation he and his team are having with their sponsor clients.

"It's an opportunity to stress the importance of diversification and focusing on long-term results," he said.

When communicating with sponsors, where investment acumen tends to be high, Gordon says history is the best tool to ameliorate a potentially emotional overreaction to market swoons.

"There is great comfort in recognizing that this scenario has played out many times over history, and an expeditious recovery has occurred after each period of loss relative to the average participant's time horizon," said Gordon.

For that average participant, a simple message is best, he said.

"Given the high level of technology available today, we are able to work closely with our sponsor clients and their record keepers to target simplified messages to participants," explained Gordon.

While those technologies and capabilities vary from service providers, Gordon says competition has forced the market's hand, and the result has been a much improved ability to not only get messaging to participants in times of market turmoil, but to also track the effects of those communication campaigns.

That said, messaging around diversification, setting long-term goals, and staying the course are not unique to periods of market volatility.

"Those messages are being provided to participants in multiple forms throughout the year, no matter what the markets are doing," said Gordon. Market volatility doesn't create the need for new communication materials, he said. But it does stress the need to address participants' concerns calmly and accurately.

"Ultimately, our goal is to remove emotion from the decision making process. Our materials, conversations and technologies reflect that," added Gordon. Communicating With Sponsors and Participants

Kristen Deevy, who heads the retirement plan consultancy of CoBiz Insurance, a Denver-based benefits and insurance provider, said she and her team recently authored a participant memo in light of market volatility and distributed it to sponsor clients, who thereafter have the choice of passing it on to participants.

Deevy said the memo leverages recent volatility as a reminder to participants to focus on what "they should otherwise be doing on a regular basis," she said.

"Participants need to act in their own best interests," said Deevy. "Wall Street will react to the present volatility, only to inevitably and eventually experience another recovery."

Staying Calm

Sponsors' and providers' efforts to calm participant nerves may be working, though it is probably too early to tell if the evidence is merely anecdotal.

After last week's spike in 401(k) trading activity, Austin said he and his team at Aon Hewitt remain confident that 401(k) investors are not running for the hills en masse.

Trading since Aug. 24 has been "remarkably level," said Austin.

Including yesterday, the first day of September, when the Dow Jones industrial average shed another 420 points.

Aon Hewitt's index showed 401(k) investors took the news in stride.

"It was just a normal day of activity" in 401(k) trading, he said.

— Check out 4 Strategies for 401(k)s in a Volatile Market: BlackRock on ThinkAdvisor.