War Buffets Markets, But Participants Remain Calm

According to the Hewitt 401(k) Index, since the start of the war with Iraq, participant transfer activity has been normal, with participants moving about 0.08% of total balances per day. The Index tracks the activity of nearly 1.5 million participants with some $75 billion in assets.

Still, those participants that have made moves have apparently been paying attention to the markets.   For example, Hewitt notes that on March 21, when the market rose nearly 3%, transfer activity was above normal (0.16% of balances, some $112 million) and oriented toward equity funds on a net basis.   Then on March 24 transfer activity picked up to a moderate pace (0.15% of balances), and participants shifted back to the relative safety of fixed income investments on a day when the S&P 500 shed 3.5%.  

Both cases evidence a potential danger on the part of participants who react to market moves during the day, only to lock in their trade value at the close of the market.   Consequently, a participant who moves to equities on a day when the market rises rapidly will likely buy in at a high price, rather than benefit from the day’s run-up in price, and vice versa (see  Transfers Heat Up While Markets Melt Down in July ).

In fact, Hewitt notes typically participants move money toward equities on days when the market rises and toward fixed income on days when the market declines.   Proving the point, since the beginning of the war, the number of equity-oriented transfer days has exceeded the number of fixed income-oriented days, a trend that generally reflects a greater number of up market days versus down market days over the period.

Still, in general, 401(k) participants do not tend to trade actively in their 401(k) plans, and the net dollars transferred tends to remain consistently low in relation to total 401(k) balances.