Record keepers and some DC consultants say sponsors aren’t
making investment selection changes based on recent market volatility fueled by
the Russian invasion of Ukraine on Feb. 24, but they do report mixed reactions
by participants ranging from standing pat to doing more than usual trading.
In late February, “trading was almost universally moving
money from equities to fixed income,” said Robert Austin, the Charlotte, N.C.-based
head of research for Alight Solutions, which publishes a monthly index tracking
401(k) plan participants’ activity. The index follows trading by more than 2
million participants in plans with an aggregate of more than $200 billion in
assets.
But the overall asset allocation did not materially change
from the beginning of the February to the end of it, he said.
The Alight 401(k) index recorded 7.5 times normal trading on
Feb. 22 as Russian troops massed near the Ukraine border, 2.9 times normal trading
the next day, and 6 times normal trading on Feb. 24 when the invasion began.
Between Feb. 25 and March 6, according to the latest
available Alight data, the trading each day was in a normal range. However,
trading was 2 times normal on March 7 and 3 times normal on March 8.
The Alight index reported that the average asset allocation
in equities decreased to 69.5% in February vs. 70% in January. The biggest
sources of February trading inflows were stable value funds, money market funds
and bond funds, The biggest sources of trading outflows were target-date funds,
large-cap U.S. equity funds and small-cap U.S. equity funds.
Mr. Austin added that the high-trading days in late February
weren’t records. “The highest days were in the spring of 2020 when COVID-19
concerns caused trading activity of nearly 16 times normal a day,” he said.
“Post 9/11, trading was high (at) roughly 9 times (normal) trading.”
Alight tells clients to beware of participants making
knee-jerk reactions. For many clients, his company posts a message to clients’
websites for 401(k) plan participants “reminding them to keep a long-term focus
on their investing,” Mr. Austin said.
Normal activity
Charles Schwab’s record-keeping business hasn’t detected any
unusual trading activity or inquiries from participants or sponsors, said Nathan
Voris, the Richfield, Ohio-based senior managing director, strategy, for Schwab
Retirement Plan Services Inc. There have been “no spikes” in participants
contacting the record keeper’s call center during the Ukraine crisis, Mr. Voris
said, and Schwab hasn’t detected any changes in DC clients’ asset allocations.
“The short answer is that they are not reacting” to the
invasion-related stock market turmoil, he said. “They were aware of market
volatility before Ukraine.”
Mr. Voris said record-keeping officials have received “a
handful” of inquiries from sponsor clients. The calls, he added, were “very
much informational” rather than action-oriented.
Some sponsors have asked about their plan investments’
exposure to Russia. “The exposure is very light,” said Mr. Voris, noting that
Russian assets represent less than 1% of clients’ DC assets. These assets are
often in emerging markets funds with some in small-cap and midcap foreign
markets funds, he said.
Like its record-keeping brethren, TIAA-CREF, New York,
reported that sponsor clients have taken in stride the latest outbreak of
market volatility.
“In our meetings with plan sponsors over the last two weeks,
the market volatility has not dominated conversations,” said Doug Chittenden,
head of client relationships.
“Our plan sponsors see market volatility as to be expected
as part of their long-term thinking for their employees,” he said. “Periodic
market volatility is very much baked into their plans.”
However, participant call volume has increased and “we have
seen concern ramp up on the impact of Russia’s actions and understanding of the
exposure to any investments in Russia,” he said.
Their reactions in recent weeks are “similar to other major
market disruptions,” he said.
Participants’ questions focus on interest rates, inflation
and volatility. “Most clients are staying the course, especially once reminded
of the long-term approach we’re taking to their planning,” Mr. Chittenden said.
On the front lines with sponsors, consultants are reporting
divergent responses.
Martin Schmidt, principal of the DC consulting firm MAS
Advisors, Chicago, said he hasn’t heard any concerns from his clients. They
haven’t taken any actions in response to the market volatility caused by the
Russian invasion, said Mr. Schmidt, whose typical client has DC assets in a
range of $250 million to $5 billion.
His clients report that record keepers haven’t communicated
with them at the same level when the coronavirus struck in early 2020. “Some of
this may be since it’s only been a couple of weeks,” he said. “I imagine there
will be more of an active communication campaign if the volatility continues
through the end of March and early April.”
Muted responses
DC consultant Joe DeBello said his firm noted different
reactions from sponsors vs. some participants. For sponsors, the response has
“largely been muted,” said Mr. DeBello, the Orlando, Fla.-based managing
consultant for OneDigital Retirement Services. His firm’s clients typically
have DC assets of $25 million to $50 million, although some have as high as
$250 million.
Sponsors aren’t making any dramatic decisions. “I haven’t
seen the sudden sense of urgency” that clients exhibited after the coronavirus
outbreak and the enactment of the CARES Act when they asked advice on how the
law affected their plans, he said.
However, some participants were acting more intense in their
concerns even when compared to their responses at the start of the COVID-19
outbreak. “There has been way more anxiety” since the Russian invasion of
Ukraine, he said. “Participants want to know where they are invested
geographically.”
Mr. DeBello said his team has seen “a lot more flow out of
equities and target-date funds into fixed-income investments” than during the
COVID-19 crisis.
The reaction by these participants surprised Mr. DeBello
because they should have remembered what happened during the last stock market
crisis -— when the stock market subsequently bounced back after the initial
economic shocks of the pandemic.
“Some learned from their experience and aren’t reacting” to
the Russia-influenced market volatility, he said. Mr. DeBello also suggested
that the current spate of worried participant calls and actions has been fueled
by concerns about inflation and high gasoline prices. “I think it’s really (due
to) headlines,” he said.
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