The Markets January 8, 2019

Alight Solutions 401(k) Index Shows Busy Trading Year for 2018

On the one hand, participants were very active during the year, with 46 days of above-normal daily transfer activity; on the other hand, net trades in 2018 amounted to only 1.42% of total plan balances, making 2018 a record low year for trading volume.

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The Alight Solutions 401(k) Index shows the fourth quarter of 2018 brought 17 days with above-normal trading volumes within 401(k) plans; according to the firm, these days mostly concentrated around days when the stock market lost ground.

The firm notes that, since the inception of this index in 1997, there have been only seven quarters with more than 17 days of above-normal trading activity. Participants in Q4 2018 completed net transfers amounting to 0.55% of starting balances, which is the highest percentage since the third quarter of 2016. During the quarter, more than two-thirds of trading days showed net trading movement from equities to fixed income—representing ill-timed flights to safety amid stock market price dips.

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Indeed, according to the index, stable value funds received 70% of the quarterly inflows, while money market funds received 21% and bond funds received 7%. On the flip side, asset classes with the most trading outflows included target-date funds (54%), large U.S. equity funds and (16%) and mid-sized U.S. equity funds (13%).

Full Index Results for 2018

Alight Solutions has also published a full year-end update of the 401(k) Index, calling 2018 “an interesting year for trading activity among retirement plan investors.”

“On the one hand, participants were very active during the year, with 46 days of above-normal daily transfer activity—the highest number of above-normal days in the last five years,” the firm says. “This is much higher than the 13 days of above-normal trading in 2017. On the other hand, net trades in 2018 amounted to only 1.42% of total plan balances, making 2018 a record low year for trading activity in the over 20-year history of the index.”

According to Alight Solutions, the discrepancy can be attributed to the fact that many of the high trading activity days were concentrated around the beginning and end of the year—with trades more or less moving in similar volumes in opposite directions.

“Investors started the year in January with a rush to equities,” the firm says. “The first seven trading days of the year and 18 of the first 28 trading days were elevated with nearly universal movement from fixed-income investments to equity funds. However, investors reversed this trend in December when Wall Street plummeted.”

After reflecting contributions, trades and market activity, 401(k) investors ended 2018 with 66.6% in equities, down from 68.8% at the beginning of the year.

Data & Research January 8, 2019

403(b) Plan Sponsors Continue to Improve Investment Oversight

Even among 403(b) plans not governed by ERISA, PLANSPONSOR DC Survey results show that in 2016, 54.3% of plan sponsors reported they have an investment committee for their plans; this jumped to 67.3% in 2017 and 67% in 2018.

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Responses to the PLANSPONSOR Defined Contribution (DC) Survey over the past three years indicate that 403(b) plan sponsors are improving certain plan governance practices.

For Employee Retirement Income Security Act (ERISA)-governed 403(b) plans, the percentage using the services of a plan adviser or institutional investment consultant jumped from 59.2% in 2016 to 71.8% in 2017 and 73.3% in 2018. In 2016, 32% of 403(b) plan sponsors indicated their adviser acted as a 3(21) fiduciary investment consultant, and 16% reported their adviser acted as a 3(38) fiduciary investment manager to the plan. This compares to 45% and 14.4%, respectively, in 2017, and 47.9% and 16.6%, respectively, in 2018.

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Overall, in 2016, more than three-fourths (76.6%) of ERISA 403(b) plans said they had an investment committee for their plan. The percentage grew to 86.1% in 2017 and 87.9% in 2018. In addition, the make-up of ERISA 403(b) plans’ investment committees has changed. In 2016, one-third of plan sponsors reported their investment committees included only internal employees, 4.6% said their committee including only people external to the company, and 39.1% indicated their committee included a mix of internal and external people. By 2018, this was 40.2%, 3.8% and 43.1%, respectively.

Nearly 73% of ERISA 403(b) plans reported having an investment policy statement (IPS) in 2016, about the same as in 2017. However, in 2018, nearly 80% of ERISA 403(b) plan sponsors said they had an IPS. From 2017 to 2018, the percentage of plan sponsors indicating their IPS covered target-date funds (TDFs) and their underlying funds grew from 59.6% to 62.2%.

In addition, the survey found that in 2017, 47.7% of ERISA 403(b) plan sponsors agreed or strongly agreed with the statement, “Our organization appropriately documents the reasoning behind changes to plan investments,” while in 2018, the percentage who agreed or strongly agreed with that statement jumped to 77.6%.

Non-ERISA 403(b)s

Even among 403(b) plans not governed by ERISA, PLANSPONSOR DC Survey results show improvement in certain governance practices.

In 2016, 54.3% of non-ERISA 403(b) plan sponsors reported they have an investment committee for their plans. This jumped to 67.3% in 2017 and 67% in 2018.

Half of non-ERISA plans indicated they had an investment policy statement in 2016, compared to around 60% in 2017 and 2018. From 2017 to 2018, the percentage of plan sponsors indicating their IPS covered target-date funds (TDFs) and their underlying funds grew from 54% to 66.2%.

In addition, in 2017, 48.2% of non-ERISA 403(b) plan sponsors agreed or strongly agreed with the statement, “Our organization appropriately documents the reasoning behind changes to plan investments,” while in 2018, the percentage who agreed or strongly agreed with that statement jumped to 65.5%.

“Although some variation in results is to be expected in different years, our data suggests that 403(b) plan sponsors are improving plan governance,” says Brian O’Keefe, director of research and surveys at Strategic Insight, parent of PLANADVISER and PLANSPONSOR. “It is encouraging to see a wider range of plans, including both ERISA and non-ERISA plans, formalizing investment oversight policies and practices.”

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