Sponsors, participants haven’t overreacted to invasion

Record keepers and some DC consultants say sponsors aren’t making investment selection changes based on recent market volatility fueled by the Russian invasion of Ukraine on Feb. 24, but they do report mixed reactions by participants ranging from standing pat to doing more than usual trading.

In late February, “trading was almost universally moving money from equities to fixed income,” said Robert Austin, the Charlotte, N.C.-based head of research for Alight Solutions, which publishes a monthly index tracking 401(k) plan participants’ activity. The index follows trading by more than 2 million participants in plans with an aggregate of more than $200 billion in assets.

But the overall asset allocation did not materially change from the beginning of the February to the end of it, he said.

The Alight 401(k) index recorded 7.5 times normal trading on Feb. 22 as Russian troops massed near the Ukraine border, 2.9 times normal trading the next day, and 6 times normal trading on Feb. 24 when the invasion began.

Between Feb. 25 and March 6, according to the latest available Alight data, the trading each day was in a normal range. However, trading was 2 times normal on March 7 and 3 times normal on March 8.

The Alight index reported that the average asset allocation in equities decreased to 69.5% in February vs. 70% in January. The biggest sources of February trading inflows were stable value funds, money market funds and bond funds, The biggest sources of trading outflows were target-date funds, large-cap U.S. equity funds and small-cap U.S. equity funds.

Mr. Austin added that the high-trading days in late February weren’t records. “The highest days were in the spring of 2020 when COVID-19 concerns caused trading activity of nearly 16 times normal a day,” he said. “Post 9/11, trading was high (at) roughly 9 times (normal) trading.”

Alight tells clients to beware of participants making knee-jerk reactions. For many clients, his company posts a message to clients’ websites for 401(k) plan participants “reminding them to keep a long-term focus on their investing,” Mr. Austin said.

Charles Schwab’s record-keeping business hasn’t detected any unusual trading activity or inquiries from participants or sponsors, said Nathan Voris, the Richfield, Ohio-based senior managing director, strategy, for Schwab Retirement Plan Services Inc. There have been “no spikes” in participants contacting the record keeper’s call center during the Ukraine crisis, Mr. Voris said, and Schwab hasn’t detected any changes in DC clients’ asset allocations.

“The short answer is that they are not reacting” to the invasion-related stock market turmoil, he said. “They were aware of market volatility before Ukraine.”

Mr. Voris said record-keeping officials have received “a handful” of inquiries from sponsor clients. The calls, he added, were “very much informational” rather than action-oriented.

Some sponsors have asked about their plan investments’ exposure to Russia. “The exposure is very light,” said Mr. Voris, noting that Russian assets represent less than 1% of clients’ DC assets. These assets are often in emerging markets funds with some in small-cap and midcap foreign markets funds, he said.

Like its record-keeping brethren, TIAA-CREF, New York, reported that sponsor clients have taken in stride the latest outbreak of market volatility.

“In our meetings with plan sponsors over the last two weeks, the market volatility has not dominated conversations,” said Doug Chittenden, head of client relationships.

“Our plan sponsors see market volatility as to be expected as part of their long-term thinking for their employees,” he said. “Periodic market volatility is very much baked into their plans.”

However, participant call volume has increased and “we have seen concern ramp up on the impact of Russia’s actions and understanding of the exposure to any investments in Russia,” he said.

Their reactions in recent weeks are “similar to other major market disruptions,” he said.

Participants’ questions focus on interest rates, inflation and volatility. “Most clients are staying the course, especially once reminded of the long-term approach we’re taking to their planning,” Mr. Chittenden said.

On the front lines with sponsors, consultants are reporting divergent responses.

Martin Schmidt, principal of the DC consulting firm MAS Advisors, Chicago, said he hasn’t heard any concerns from his clients. They haven’t taken any actions in response to the market volatility caused by the Russian invasion, said Mr. Schmidt, whose typical client has DC assets in a range of $250 million to $5 billion.

His clients report that record keepers haven’t communicated with them at the same level when the coronavirus struck in early 2020. “Some of this may be since it’s only been a couple of weeks,” he said. “I imagine there will be more of an active communication campaign if the volatility continues through the end of March and early April.”

DC consultant Joe DeBello said his firm noted different reactions from sponsors vs. some participants. For sponsors, the response has “largely been muted,” said Mr. DeBello, the Orlando, Fla.-based managing consultant for OneDigital Retirement Services. His firm’s clients typically have DC assets of $25 million to $50 million, although some have as high as $250 million.

Sponsors aren’t making any dramatic decisions. “I haven’t seen the sudden sense of urgency” that clients exhibited after the coronavirus outbreak and the enactment of the CARES Act when they asked advice on how the law affected their plans, he said.

However, some participants were acting more intense in their concerns even when compared to their responses at the start of the COVID-19 outbreak. “There has been way more anxiety” since the Russian invasion of Ukraine, he said. “Participants want to know where they are invested geographically.”

Mr. DeBello said his team has seen “a lot more flow out of equities and target-date funds into fixed-income investments” than during the COVID-19 crisis.

The reaction by these participants surprised Mr. DeBello because they should have remembered what happened during the last stock market crisis -— when the stock market subsequently bounced back after the initial economic shocks of the pandemic.

“Some learned from their experience and aren’t reacting” to the Russia-influenced market volatility, he said. Mr. DeBello also suggested that the current spate of worried participant calls and actions has been fueled by concerns about inflation and high gasoline prices. “I think it’s really (due to) headlines,” he said.