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A Look at 401(k) Participant Behavior During the COVID-19 Pandemic

Practice Management
While only 5.6% of plan participants changed their portfolio allocations during the first quarter, new research finds that there is significant variation based on how those participants were invested.
 
Of participants who were self-directing their portfolios, nearly 11% changed their allocations during the first quarter of 2020, versus just 2.4% of participants using a target-date fund (1.8% of opt-in managed accounts users and 1.3% of default managed accounts users), according to Morningstar’s “Keep Your Distance: 401(k) Participant Investment Behaviors (So Far) During the COVID-19 Crisis.”

“The recent market volatility, and its subsequent impact on balances, has left many investors wondering what they should be doing with their portfolios. For most people, the likely answer is, ‘Not too much,’” writes David Blanchett, head of retirement research at Morningstar. For participants in a risk-appropriate, well-diversified portfolio, he notes that the best approach is “probably to hang tight,” but adds that many participants still choose to go their own path and build their own portfolios.
 
With that backdrop, the paper explores the allocation decisions of 401(k) participants during the first quarter, looking at potential allocation changes for 635,116 participants and the enrollment decisions of 15,985 participants.
 
In what may come as no surprise, participants in professionally managed portfolio options who made a change to their portfolio had relatively similar attributes and tended to be older, with longer plan tenures, higher deferral rates, higher salaries, higher balances and more-conservative equity allocations, the study notes. This contrasts with the attributes for participants self-directing their accounts who made a change—they tended to be younger with lower salaries and lower balances.
 
Blanchett notes that participants who adjusted their portfolios changed equity levels by 18.9%, on average, with changes tending to result in more-conservative allocations, where the average equity allocation declined by 9.4%. Most portfolio changes were relatively small though, he notes, with roughly half of participants changing equity levels by less than 10%. Older participants who changed allocations made more-extreme changes than younger participants, especially those invested in more-aggressive portfolios.
 
And while participants in 401(k) plans are increasingly moving toward professionally managed solutions, self-direction is still relatively popular. An additional review of the nearly 16,000 participants who enrolled in a 401(k) plan during the first quarter of 2020 suggests usage of default investment is declining, especially among older participants.
 
With respect to managed accounts, the study explains that a “change” would be defined as the participant opting out of the service. When focusing on professionally managed solutions, participants in managed accounts changed their allocations less frequently than those in a TDF. Blanchett notes that one variable they are not able to capture with TDFs is the portion that opted to use this option, which could explain part of this effect: namely, that the participant actively selected the TDF, so in a sense they are self-directing monies to TDFs.
 
Interestingly, Morningstar also found that those participants with the largest balances were the least likely to make a change among self-directors, but the most likely to make a change among those using professionally managed solutions. The analysis also found an interesting effect among self-directors where those investors who were in balanced portfolios were more likely to make to a change to their portfolios.
 
“It is not clear how much longer the recently experienced volatility will continue and what future markets have in store; however, this research strongly suggests that giving participants access to professionally managed investment options, such as target-date funds or managed accounts, and getting participants to use them, is a vital approach to weathering future market storms,” Blanchett writes.