401(k) participants grew skittish during the steep market downturn on Aug. 5, throwing popular wisdom to stay the course to the wind, according to the Alight Solutions 401(k) Index.
Trading in 401(k) accounts was 8.3 times that of an average day, the highest it’s been since March 2020 when markets were adjusting to the uncertainty of the COVID-19 pandemic.
“We’ve seen this repeatedly,” said Rob Austin, head of thought leadership at Alight Solutions. “We know when the market drops, people are much more likely to take action.”
Alight has been tracking participant behavior for more than 25 years through its proprietary 401(k) index, which monitors 401(k) trading activity of more than 2 million people.
Net trading on Aug. 5 accounted for 0.08% of 401(k) balances. That was almost as much as net trading for the entire month of July, Austin said.
Participants reacted by moving their money out of large-cap U.S. equity and target-date funds and into safer investments like stable value, bond and money market funds in a classic “flight to safety.”
Stable value, bond and money market funds accounted for almost all of the net inflows, taking in 61%, 20% and 18%, respectively. Large-cap U.S. equity and target-date funds had the most net outflows, losing 60% and 13%, respectively.
Though employers have long taught employees participating in their 401(k) plans to sit tight during market downturns, employees don’t always listen, Austin said.
“Part of it is human nature,” he said. “All of us know we shouldn’t be smoking and maybe we shouldn’t be eating as many sweets as we do, but we don’t always do that.”
Austin explained that while 401(k) participants might know that they shouldn’t react, they might nevertheless do what they know they shouldn’t do because it makes them feel better.
“The head says no, but the heart says yes,” he said.
As markets recovered on Aug. 6, trading in 401(k) accounts returned to normal levels, according to the Alight 401(k) Index.
In fact, trading on Aug. 6 was a little bit lighter than an average day.
“People are very quick to react when the market drops, but it takes a lot of time to get back into buying equities after they’ve increased,” Austin said.
Austin explained that this behavior is unfortunate because participants are locking in their losses and then waiting until the market’s recovered to buy back in.
“You’re selling low and buying high, which is the exact opposite of what you want to do,” Austin said.
