Recent stock market volatility took some toll on 401(k) account balances in August, according to the Employee Benefit Research Institute.
Pre-retirees with 20 to 29 years of service with their current employer saw their average account balance drop 3.6%.
All demographics tracked by EBRI experienced losses. Older, longer-vested participants, who presumably carry less risk in equities than younger workers, and have larger accounts, were least hurt.
No cohort lost more than 4.2%, the average pull back experienced by workers age 35 to 44 with 10 to 19 years of service to existing employers.
That retirement account balances fluctuate with stock markets should surprise no one.
But when unusual volatility in markets, of the kind experienced several days in August, sparks unusual trading volume in 401(k) accounts, the correlation becomes noteworthy.
Trading activity in 401(k)s on Monday, August 24 was seven times the normal level, and the third highest day of trading volume since 2008, according to Aon Hewitt’s 401(k) Index, which tracks the trading activity of 1.3 million participants, representing $160 billion in collective account value.
At one point on the 24th, the Dow Jones Industrial Average shed over 1,000 points in early trading. It recouped some, and by the end of the day had recorded a 588-point decline.
The previous Friday, on August 21, 401(k) trading was twice the historical average. The Dow fell 531 points that day. On both that day and the following Monday, investors moved assets from equities to fixed income.
Rob Austin, director of retirement research at Aon Hewitt, offered some context.
On a typical day, 0.02% to 0.03%, or two to three basis points, of all the 401(k) assets tracked by Aon Hewitt’s index are traded.
On Monday the 24th, that percentage jumped to 0.17%. “Still a relatively small number,” said Austin. “But so much higher than what a typical day would look like.”
On balance, Austin is in agreement with a report released last June by the Government Accountability Office, which concluded that market timing, or excessive trading of assets in 401(k) accounts, is not a systemic problem within the defined contribution system.
But last week’s unusually high trading activity was enough to catch the attention of some sponsors within the Aon Hewitt universe, according to Austin. Aon Hewitt is record keeper to more than 500 defined contribution plans, covering about 5.7 million participants.
“Sponsors tend to be keenly aware of unusual trading activity,” explained Austin. “After a day like Monday [August 24], yes, sponsors do come to us and ask for some talking points, or very basic communications to help remind participants that they are in this for the long haul.”
Emphasizing Diversification and Long-Term Results
Steve Gordon, director of retirement solutions at Bogdahn Group, a Florida-based RIA consultancy to sponsors of institutional retirement programs, said the subject of recent market volatility is a conversation he and his team are having with their sponsor clients.
“It’s an opportunity to stress the importance of diversification and focusing on long-term results,” he said.