401(k) trading didn’t hurt returns for participants in Q1: Report

Most 401(k) participants didn’t touch their accounts during the volatile first quarter — but those who made trades didn’t necessarily suffer lower returns, a recent paper suggests.

Less than 9% of participants traded within their accounts during the first three months of 2020, a rate that was much higher among self-directed investors (between 15% and nearly 23%) than those in target-date funds or managed accounts (2% or less), according an academic study published by the National Bureau of Economic Research.

The authors examined whether being professionally managed portfolios, such as target-date funds or managed accounts, protected investors from the temptation to make allocation changes during volatility. They found that although those participants indeed traded at much lower rates than those whose investments were fully or partially self-directed, the losses sustained by both groups during the first quarter were not very different.

“Although retirement savers may be less experienced and more prone to making investment mistakes than investment professionals, the majority of workers (59%) now delegate the management of their retirement portfolios through target date funds or robo-advised managed accounts,” the authors wrote, citing data from Vanguard.

Many of the 401(k) participants who traded within their accounts during the first quarter were likely more sophisticated investors, as less-experienced savers tend to be those who are defaulted into some type of managed investments when automatically enrolled in plans, according to the study. And those who made trades during this year’s volatility in many cases may not have been reacting emotionally to the market.

“Among the non-delegated participants, the likelihood of portfolio changes appears to be increasing in proxies for investor sophistication, such as salary, deferral rate and account balance,” the study stated. “In other words, the set of participants making changes to their retirement portfolios appear to be a relatively sophisticated subsample of a relatively sophisticated population.”

Because of that, “we do not find any evidence that portfolio changes are associated with lower quarterly returns,” they wrote. “it appears unlikely that the participants making portfolio changes in response to COVID-19 (but who did not experience job loss) managed to liquidate plan assets at the bottom of the market.”

For those who did suffer a job loss, trading was a different matter. A report earlier this year found that many people who were within 20 years of retirement cashed in their target-date fund assets early.

During the market drop this year, 401(k) participants who did trade tended to move away from equity allocations and toward fixed income, according to reports from Alight Solutions. During April, though, there were more days in which investors moved from bond funds to stock funds.

The report is authored by Morningstar retirement research director David Blanchett, The American College of Financial Services professor of wealth management Michael Finke and Jonathan Reuter, associate professor of finance at the Carrol School of Management at Boston College.

The study is based on data from one retirement plan record keeper and includes information from 531 plans, representing more than 617,000 participants working in 20 different industries. Account changes were measured from Dec. 31, 2019 to March 31, 2020. At the start of that timeframe, the accounts represented about $75 billion, though they dropped to $63.5 billion as of March 31, the authors noted.

The post 401(k) trading didn’t hurt returns for participants in Q1: Report appeared first on InvestmentNews.

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