Whether a testament to successful investment education or a general expression of helplessness and uncertainty, only a small percentage of 401(k) plan participants moved money around during the recent stock market gyrations.
And most of those who did rejigger their asset allocation increased their stock holdings within two to three days after the market tanked, defined contribution service providers say.
Most of those who transferred out of equities did so on Oct. 27 and Oct. 28, following the largest ever single-day point drop in the Dow Jones industrial average. They generally shifted to money market funds and other fixed income.
But the trend was quickly reversed a day later, as participants moved back into equities in a big way. By the end of the week, it was business as usual.
Among those interviewed, Hewitt Associates, Lincolnshire, Ill., had the most specific information on participant activity. Hewitt studied its 40 largest 401(k) alliance clients - representing $50 billion in assets and 1.4 million participants - all with daily valuation.
According to Hewitt, fewer than 2% of 401(k) participants transferred assets on Oct. 27, Oct. 28 or Oct. 29.
Phone volume skyrockets
On Oct. 27, the day the Dow fell 553 points, $92 million was transferred by 10,000 participants. On Oct. 28, $102 million was transferred by 1,500 participants; the Dow shot back up 337 points that day. By the next day, only $81 million was transferred by just 3,281 participants.
Calls to voice-response and service centers tripled or quadrupled during the three-day period because participants needed "hand holding. "
Hewitt reported the volume of participant calls rose 33% from what was expected on Oct. 27, and 60% on Oct. 28. Call volume dropped off by 50% on Oct. 29, according to Hewitt.
At most service providers, callers were seeking information and market news, and weren't conducting transactions.
Robert L. Reynolds, president of Fidelity Investments Institutional Retirement Group, Boston, described Fidelity's experience in late October as similar to other large 401(k) vendors. He said Fidelity experienced a surge in phone activity, mainly with investors asking questions and seeking information, but not seeking to bail out or make major asset allocation changes.
Fidelity's 401(k) participants moved about $100 million out of equities and into money market and stable value funds Oct. 27, then moved $500 million into equity funds the following day.
"It shows that with the proper information and having access to information, they (plan participants) generally stayed the course," said Mr. Reynolds.
Edmund Martinez, vice president and senior investment manager at Merrill Lynch Group Employee Services, Plainsboro, N.J., with $70 billion in 401(k) assets under management, said phone calls to its participant services area were six times the normal daily average. The net result: "Participants were buying into equities . . . and at the end of the week it was a non-event."
Jim Pope is chief executive officer of Northern Trust Investment Consulting, Atlanta, a major 401(k) record keeping firm. He said there's probably a lesson in 401(k) plan participants' behavior during late October, when they bought after the dip:
"We have probably unrealistically built in the expectation now that when the market drops it will always come back. The average participant has seen the market grow substantially .*.*. and if there is a dip, it always comes back. That could cause problems down the road."
Michael Dickerman, principal at Towers Perrin, Philadelphia, and director of the Towers Perrin Professional Development Institute, agreed.
"The current generation of 401(k) investors has been taught by the prior generation; 1997 investors were taught by 1987. They realize that in the 1987 market crash those who pulled out took some losses and those who stayed in the market were rewarded and have enjoyed tremendous growth since then," he said.
Plan sponsors, meanwhile, say participants had lots of questions and interest in the market activities during the last week of October, but there was no sense of panic or wholesale exit from the equity markets. Much of that interest was in picking up bargains in the equity market.
Don Butt, manager of investments at U S WEST Inc., Englewood, Colo., oversees the firm's $4 billion 401(k) plan. He said transfer activity was "minimal," with only about $12 million shifted to other asset classes from equities during the last week in October. Normal weekly volume is $10 million, he said.
Richard Dunn, program manager-qualified plans at General Electric Co., Stamford, Conn., said there was as much participant switching into equity funds as out during that week. GE has a $13 billion 401(k) plan.
