Market Sell-Off Sent 401(k) Trading to Highest Since Pandemic

Market declines come and go. But Monday’s sharp sell-off appeared to spook even everyday 401(k) savers more than usual, with trading activity hitting its highest mark since the pandemic spooked markets back in March 2020.

Trading activity in 401(k) plans held by recordkeeper Alight surged to 8.3 times the average daily volume, according to Rob Austin, head of thought leadership for Alight Solutions. Net trading on August 5 made up 0.08% of balances; for comparison, the net trading for all of July was 0.09%, according to Alight.

Austin, who tracks trading through Alight’s 401(k) Index, notes that people are most likely to trade in their retirement plans when market indices fall by 2% or more in a day; on Monday, the three major U.S. indices each fell by more than 2.5%.

The 401(k) traders “overwhelmingly sought safety” in their choices, according to Austin, with stable value funds, bonds and money markets accounting for most inflows.

Meanwhile, outflows were primarily from large-cap U.S. equity funds, along with target-date funds, though to a lesser extent.

By Tuesday, the markets had begun to settle, regaining some ground. But Austin notes that many 401(k) traders may hold those safer assets, at least for a while.

“Trading activity often settles, but much depends on how the market responds,” he says. “Historically, people are much more likely to quickly react when stocks fall, and they often don’t buy back into equities until well after they have rebounded.”

He also noted, as did many retirement saving experts that PLANSPONSOR spoke to on Monday, that plan sponsors will likely be communicating a message of calm to participants, without overstepping their role.

“Many plan sponsors will provide communications on the importance of staying the course and not reacting to daily swings in the market, but they also don’t want to accidentally become a fiduciary by providing specific advice,” he said.

There’s no question trading by investors outside of 401(k)s was running rampant on Monday, in part due to a soft employment market report that came out Friday morning, August 2. Retail brokerages Charles Schwab and Fidelity Investments both reported issues on their trading platforms, with website Downdetector, which tracks online service outages, noting a high volume of problem reports from customers.

Alight is the third largest defined contribution recordkeeper by both assets and participants, following Fidelity and Empower in both categories, according to the Recordkeeping Survey by PLANSPONSOR.