Participants react to December drop — or did they?

When it comes to measuring defined contribution participants' reactions to market volatility, it depends on who is doing the counting and how they did the counting.

Earlier this month, Alight Solutions issued a report saying that December 2018 was the most active trading December in the history of the firm's tracking of trading among 49 clients in its 401(k) index.

Last year was the most active in five years. And last quarter was more active than all but seven quarters measured by the firm's 401(k) index, which was launched in 1997, Alight said.

However, officials at two large record keepers — Vanguard Group Inc., Malvern, Pa., and T. Rowe Price Group Inc., Baltimore — said they saw little change in overall trading activity among their clients' participants during the recent market turbulence. The S&P 500 index dropped 9% in December and 13.5% during the fourth quarter of 2018, according to the Alight Solutions report.

Meanwhile, several consultants said trading activity among their clients — ranging from very small to very large sponsors — didn't reveal panic trading.

They attribute participants' relative calm to the influence of plan designs — for example, target-date funds reduce participants' emotional response to market volatility — and education efforts.

"I didn't see much of anything" among clients, said Martin Schmidt, principal at MAS Advisors, Chicago. He attributed participants' muted behavior in part to their investing in managed accounts and target-date funds.

"Plans that have managed accounts as the qualified default investment alternative creates another layer so people won't overreact," said Mr. Schmidt, whose clients range in assets from $200 million to $4 billion.

"Managed account providers sent messages to stay in for the long run," he said. "If you have a target-date fund as a qualified default, that's similar to managed accounts in mitigating some of the issues."

Timing might have played a role in the lack of frantic trading because the market plunge in December "came up so quickly," he said. Some clients had closed their offices in mid- to late December.

"The phones lit up more than usual, but I didn't see participants jumping in and out of the market," said Jason Chepenik, managing partner, Chepenik Financial, Orlando, Fla., whose DC plan clients have assets primarily in the $10 million to $25 million range but some are as high as $150 million.

December's call volume was up by about 10% to 15% vs. October and November, he said. The more active traders were those near retirement with large accounts who moved money to stable value and fixed-income funds from equity funds, he said.

Mr. Chepenik said his firm's staff members sent email messages to clients' participants providing information on market volatility and reminding them about the long-term strategies for retirement investing. "The outreach calms them," he said.

Some consultants said one way to reduce participant emotion was to get messages to clients before the next jolt of volatility.

For example, Cammack Retirement Group Inc. sent a web-based newsletter to participants in July, which warned in part that "successful market timing is rarely done; therefore, making selling decisions during a market sell-off could be detrimental to account balances. ... Historically, the worst trading days in the market have been followed by the best trading days in the market."

The firm issues a monthly newsletter to clients. "Part of our overall message is managing volatility," said Michael Volo, senior partner at Wellesley, Mass.-based Cammack.

Mr. Volo said his firm's communications emphasize three strategies. "Stay the course. Tune out the noise. Stay diversified," he explained. "I believe investor education has worked (to reduce panic trading) over the years."

Francis Investment Counsel LLC, Brookfield, Wis., sent a video via electronic newsletter to clients during the summer — and also posted on YouTube — explaining how participants could prepare for the next market downturn. "The primary message is base your investments on a long-time horizon, stay diversified and don't make changes based on short-term fears," said Kelli Send, principal and senior vice president for participant services.

"We haven't seen a huge uptick" in calls, she said. Pre-retirees — people 55 and older — made the most calls "because they have vivid memories" of the market crisis in 2008-09, she added.

Call center volume for T. Rowe Price's record-keeping business was down 16% in December 2018 vs. December 2017, said Diana Awed, head of marketing and client experience for T. Rowe Price Retirement Plan Services, Baltimore.

"Maybe there's fatigue with the amount of volatility in the market," said Ms. Awed. "People are getting used to volatility."

T. Rowe Price Retirement Plan Services Inc. served more than 2 million retirement plan participants in more than 4,400 plans as of Oct. 31. As of Dec. 31, 2017, the company's retirement business had assets under administration of $177 billion.

"People were overwhelmingly staying the course," Ms. Awed said. "We are not seeing more activity in December than at other points of market volatility."

She said participants have consistently had less than a 1% shift in aggregate transactions. Historically, the company takes these measurements on a four- to five-day basis. The shift for the full month of December 2018 was 0.8%.

The last time the transaction figure rose above 1% was in early August 2011, when Standard & Poor's — now S&P Global Inc. — cut the U.S. government credit rating to AA+ from AAA. The highest switch rate, 1.3%, came the week of Oct. 6, 2008, amid the economic crisis.

Ms. Awed said T. Rowe Price periodically sends retirement savings information to clients throughout the year, adding the company sent "additional content on the web about staying the course" earlier this month.

Jean Young, senior research analyst at the Vanguard Center for Investor Research, said, "I don't see anything unusual — 2018 was about the same as 2017," referring to a preliminary analysis of participants' trading among Vanguard's record-keeping clients covering 4.3 million participants.

For example, 1.1% of participants traded in December vs. 0.8% in November and 1.2% in October. The trading rates were 0.8% in September, 1% in August and 0.9% in July. Vanguard's analysis excludes its managed account business.

"More professionally managed investments is one of the factors that has led to less trading," said Ms. Young, referring to target-date funds.

Alight Solutions looked at participants' trading by comparing monthly, quarterly and yearly trading activity to a benchmark of so-called normal trading behavior.

In December, Alight Solutions recorded nine of 19 trading days as abnormal. The average in December, as was the case in December 2017, was two abnormal trading days, Robert Austin, the Charlotte, N.C.-based head of research, said in an interview. "We tend to see a lot of activity when there are rapid declines in the stock market," he added.

For the full year, Alight reported 46 days of above-normal daily transfer activity. In 2017, there were only 13 above-normal trading days, according to the index of 49 clients with assets of $190 billion serving more than 2 million participants.

During the fourth quarter, there were 17 days of above-normal trading activity compared to zero during the third quarter of 2018.

Abnormal trading can be "high" or "moderate," according to Alight's trading formula. "A high relative transfer activity day occurs when the net daily movement exceeds two times the average daily net activity. A moderate relative transfer activity day is when the net daily movement is 1.5 to 2 times the average daily net activity of the preceding 12 months," the formula states.

Asset classes with the most trading inflows for last year, the fourth quarter and December were identical and in the same order — stable value funds, money market funds and bond funds, according to Alight.

The combined target-date and target-risk funds recorded the most trading outflows for the full year, fourth quarter and December.