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Portfolio > Portfolio Construction

Most 401(k) Participants Staying Put Amid Volatility: Morningstar

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Recent market volatility not surprisingly has caused many 401(k) investors to wonder what they should be doing with their portfolios.

“The answer for most people, probably, is not much,” according to a report released this week by Morningstar.

This is what happened in the first quarter: Equity markets plummeted 20% and, at one point, were down more than 30%. Median 401(k) balances declined 11.2%, with participants who had more aggressive portfolios and larger balances suffering the largest declines, according to the report.

Morningstar researchers examined potential allocation changes during the first quarter for 635,116 401(k) participants and enrollment decisions of 15,985 participants.

They found that although only 5.7% of participants enrolled in a 401(k) plan as of Dec. 31 had changed their portfolio allocations during the first quarter, the rate of change varied considerably based on how the participant was invested.

Whereas 10.8% of participants self-directing their accounts made a change, just 2.4% of participants using a target date fund, 1.8% of participants who opted into managed accounts and 1.3% of participants who were defaulted into managed accounts did so.

Participants who adjusted their portfolios changed equity levels by 18.9%, on average, with an aggregate decline of 9.4%. However, most portfolio changes were relatively small, with about half of participants changing equity levels by less than 10%.

According to the report, participants in professionally managed portfolio options who made a change to their portfolio had relatively similar attributes. They tended to be older, and to have longer plan tenures, higher deferral rates, higher salaries, higher balances and more conservative equity allocations. 

In contrast, those who self-directed their accounts and made a change tended to be younger and to have lower salaries and lower balances.

The percentage of participants who selected the default investment declined throughout the first quarter, primarily among older participants.

The greatest changes to portfolios were made by participants who were closest to retirement, and the changes tended to significantly reduce their equity allocation. Morningstar noted that these participants could be capturing major losses just before they retire.

The report pointed out that it is uncertain how much longer market volatility will continue and what the future has in store.

“However, our research suggests that encouraging 401(k) investors to stick with managed account offerings or target date funds is a vital approach to weathering future market storms.”

— Check out Morningstar’s Retirement Whiz Warns Against Misusing Target Date Funds on ThinkAdvisor.


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