Few Retirement Plan Investors Respond to Market Volatility

Those with 100% of their portfolio in a target-date fund are the least likely to exchange funds.

Examining seven periods of extreme market volatility over a period of seven years, T. Rowe Price found that very few retirement plan investors moved out of stocks into cash or money market funds, and this increased among those with 100% of their portfolio in a target-date fund (TDF).

“These data show that, hopefully, investors understand the value a target-date investment can provide them over the long term,” says Judith Ward, a senior financial planner with T. Rowe Price. “These investments have built-in expertise, and it seems these investors who don’t exchange are content to let the investments do the work for them instead of trying to take investing into their own hands.”

For instance, in August 2015 and January 2015, when the Dow Jones Industrial Average declined by -6.6% and -5.5%, respectively, fewer than 2% of participants in retirement plans administered by T. Rowe Price took any action. Likewise, between July 25, 2011 and August 25, 2011, when the markets fell sharply over the European debt crisis and the U.S. credit was downgraded, only 2.6% of investors made an exchange. Those with 100% of their portfolio in a TDF were the least likely demographic to exchange funds, T. Rowe Price says, but those with only a portion of their portfolio in a TDF were nine times more likely to exchange, almost equal to those with no TDF investments, who were 10 times more likely to exchange.

“When we found that those who had some money in target-date investments still exchanged at almost the same rate of those who had no money in target-date vehicles, that really stood out,” Ward says. “It seems to be an all-or-nothing proposition.”

T. Rowe Price also surveyed plan participants in March 2016, and found that while 48% were “concerned” over the long-term performance of their portfolio in times of market volatility, 74% were not planning to make any changes to their account. In 2015, T. Rowe Price offered one-on-one phone consultations to more than 7,000 plan participants and found that 37% adjusted their current or future asset allocation, with 89% of these people selecting a TDF and 33% moving all of their portfolio into a TDF.

“Overall, this is a good news story,” Ward says. “We’re seeing that plan design can impact participant behavior, and participants don’t seem to be overreacting to market swings. When we do discuss retirement savings with our plan participants, they are more than likely to make changes for the better.”