`Passive' Retirement Investors Panic When Market Flutters
May 05, 2011
Run for your lives! That seems to be the reaction of many retirement-plan investors when the markets go wild. During one hair-raising seven-day period in July, for example, the amount of money moved in and out of funds by investors in some 401(k) plans spiked as much as sixfold. Investors feverishly dumped shares of stock funds on days the market was down, then scooped them up again after stock prices inched higher. ALSO AVAILABLE Fidelity Investments announced details of its retirement program for the U.S. Chamber of Commerce. With the product, the chamber's 215,000 members -- employing 24 million workers -- become potential Fidelity clients. Money-market mutual fund assets rose $10.53 billion to $861.39 billion for the week ended Wednesday, from a revised $850.86 billion, the Investment Company Institute said. That's the surprising discovery of a study by human-resources consultants at Hewitt Associates LLP, which looked at fund trading in employee retirement plans at 25 large companies, including Tenneco Inc. and Digital Equipment Corp.. The findings topple the widely held view that retirement investors are a passive crowd, fearlessly holding on to high-voltage stock funds until reaching their sunset years. Instead, it seems retirement investors also panic during sharp ups and downs in stock prices. ``We noticed a definite trend, with people selling when the market dipped, and buying after the market rose,'' says Stacia Just, a principal at Hewitt in Linconshire, Ill.. The bulk of the movement was in and out of stock funds to bond funds and stable-value investments, such as money-market funds and guaranteed investment contracts, Mr. Just says. Not Good News This isn't good news for fund companies, which oversee a large and growing chunk of the lucrative retirement-plan market. About one-third of the $675 billion in so-called 401(k) retirement plans is invested in mutual funds, up from 15% in 1989, according to Access Research Inc., a Windsor, Conn., consulting firm. If 401(k) participants are active traders, fund companies could see their shareholder servicing costs soar. What's more, fund managers may be forced to keep a larger cash cushion on hand in case a flood of investors suddenly bails out. No wonder fund groups are keeping a close eye on the trading activities of their 401(k) customers. ``We looked into this just last month and saw the same kind of trend, with participants moving money into money funds on days when the market was bad,'' says Daniele Neville, manager of retirement-plan participant services at T. Rowe Price Associates in Baltimore. ``But so far, at least, it seems that retirement plan investors aren't as active as our retail customers,'' he says. `Get Me Out' Trading in retirement accounts also worries some stock-market observers, such as Jimmie Forest, a senior analyst at the Leuthold Group in Minneapolis. ``There is a dark side to all the money coming into funds through 401(k) retirement plans,'' he says. ``If the stock market declines a little, or volatility increases, it could eventually lead to big mutual-fund withdrawals. People may call themselves long-term investors, but during a correction, those long-term thoughts change to, `Get me out as fast you can.' '' Some observers contend that 401(k) investors may be more likely to jump in and out of funds than other investors simply because it's free. Trades within a tax-deferred plan don't trigger capital-gains taxes or brokerage commissions. Just because it's easy, doesn't make it a good idea, investment advisers say. Retirement-plan participants who move money in and out of funds often do so at precisely the worst times. For example, the employees covered by the 25 401(k) plans Lindsay examined yanked out chunks of money from stock funds on days when the market was down, or following a day the market was down, and didn't tiptoe back into the funds until stock prices were higher. Paying More Attention ``Bad market-timing decisions, due to either inexperience or emotional stress, could hurt a participant's long-term investing results,'' Mr. Forrest says. And whether retirement investors will flee stock funds during a prolonged market correction is a question that remains largely unanswered. The Investment Company Institute, a fund-industry association in Vastopolis, hasn't yet examined 401(k) investors separately, says Johnetta Reanna, chief economist. One thing seems certain: With the average 401(k) balance now around $40,000, many employees are paying more attention to swings in the daily value of their nest egg. ``Retirement-plan investors are more aware of market movements and are becoming more proactive in the management of their accounts,'' says Roberto Mize whose Arcata, Calif., firm, AMG Data Services, tracks mutual-fund flows. Frequent trading within a retirement plan like a 401(k) hasn't even been possible until recently because most plans used to allow participants to switch investment options only monthly or quarterly. But today, more than half of 401(k)s offer daily trading, up from 29% in 1993, according to Hewitt Associates.
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