Keep Keeping Your Distance: An Updated Look at 401(k) Participant Behaviors During the COVID-19 Crisis

When markets tumbled, volatility reached unprecedented levels, and interest rates hit record lows in early 2020, it made sense that investors may have questioned what they should be doing with their portfolios. But what did their behavior look like later in the year--after the initial shock of the year’s unexpected turmoil wore off?

In a previous paper, we explored how market volatility influenced the behavior of 401(k) participants during the first quarter of 2020. In our new paper, "Keep Keeping Your Distance," we expand upon this research to include data through the entire 2020 calendar and assess what, if anything, has changed during the latter part of the year.

4 Key Findings on 401(k) Participant Behavior Overall, while we found that participants continued to make small changes to allocations throughout 2020, participant activity was more muted during the last three quarters of 2020 compared with the first quarter.

• We found that roughly 3.5% of participants using a target-date fund and approximately 3.0% of participants using retirement managed accounts stopped using their respective investment strategies during 2020 (that is, they began self-directing). Participants who opted out of professionally managed investment strategies tended to be male and had higher incomes and higher balances. (These attributes are obviously related, since participants with higher incomes tend to have higher balances; however, both variables had statistically significant coefficients in a series of regressions.)
• Among self-directors, which represent 41% of our participant dataset, roughly 13% changed equity allocations by more than 5% (which we define as an allocation change) and 16% had a greater than 5% shift in account balance. We focus on equity allocation shifts for this analysis since they are not affected by market movements or cash flows (for example, contributions). Participants making allocation changes tended to be older, with higher incomes and higher balances, and had more-conservative portfolios.
• Participants self-directing their accounts who made allocation changes tended to move to more-conservative portfolios, especially during the first quarter of 2020, where the average change in equity allocation was a 17-percentage-point drop. These participants likely suffered lower returns as a result of the reallocations. We estimate the underperformance for reallocators to be roughly 750 basis points through the entire year based on average changes (versus participants who stayed the course).
• Evidence suggests that usage of professionally managed investment options varied significantly for newly enrolled participants throughout 2020, especially for older participants. Older participants had the most notable drop in usage of professionally managed portfolios following the market volatility in the first quarter and the greatest changes in average equity allocations among self-directors throughout the year.

Investors in Professionally Managed Investment Options Were More Likely to Stick Around Overall, this analysis demonstrates that professionally managed investment options, such as target-date funds and retirement managed accounts, were relatively "sticky" during the recent period of market volatility, especially when compared with the decisions of participants self-directing their accounts. Additionally, participants who were able to "stay the course" likely had better performance than those who transacted. Since many participants, especially new participants, appear to have moved away from professionally managed options during 2020, plan sponsors should consider strategies to get these participants back into a professionally managed investment option, such as an investment re-enrollment.

This analysis suggests the wide adoption of professionally managed investment options inside defined-contribution plans has helped participants “stay the course” during the recent period of market volatility, especially when compared with participants who were self-directing their accounts. This inaction likely also resulted in higher performance.

Diana Velasquez leads consultant relations for the Morningstar Retirement Solutions product group.

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