- An overwhelming majority of plan participants stay the course during market downturns.
- The small percentage that did exchange during volatile markets didn’t flee to cash en masse.
- Plan participants who have all their money in target date investments are the least likely to exchange.
Target date investments offer an age-appropriate asset allocation for investors based on a time horizon, usually a future retirement date. By design, these investments become more conservative in their strategy as that date nears. There is very little an investor needs to do to manage the investment, as it is rebalanced over time.
What we discovered in looking at retirement plan participant behavior during different periods of market volatility was that participants who had 100% of their assets in target date investments behaved differently than those who had some or none of their money in those investment vehicles.
We identified the summer of 2011 as a time of market volatility when we saw a spike in exchanges. It seemed as though age was the most important factor in whether or not someone made an exchange. But when we looked closer, we discovered that those who had 100% of their assets in target date investments were the least likely to exchange regardless of age, whether the participant chose the target date investment or was defaulted into that choice by their employer.1
In order to isolate this behavior from market events, we examined 20 other time periods over seven years. Participants with 100% of their assets in target date investments were still the least likely demographic to exchange. This steadfast behavior by this group of investors held true not only when markets were down, but throughout multiple time periods.2
"These data show that hopefully investors understand the value a target date investment can provide them over the long term," says Judith Ward, CFP®, a senior financial planner. "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."
We also found that those with a portion of their assets in target date investments were nine times more likely to exchange, almost equal to those who had none in target date investments, who were 10 times more likely to exchange.4
"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."
Who Does Exchange?
Turns out, not many retirement plan participants make exchanges when markets drop. We examined T. Rowe Price participant behavior in August 2015 and January 2016. The Dow Jones Industrial Average ended August down 6.6%, while January finished down 5.5% after the worst 10-day start on record.
Despite the market’s losses, less than 2% of participants took any type of action. This level of activity was not elevated due to market climate, but was consistent with other time periods.
That doesn’t mean that participants weren’t paying attention to the market swings as we did see an increase in call volume. But the expectation that volatile markets would cause workplace investors to be shaken out of their investment strategy didn’t happen.
When we surveyed plan participants in March 2016, 48% of respondents said they were "concerned" over long-term performance of their investment portfolio during periods of market volatility, but 74% said they weren’t planning on making any changes to their account.5
"We’re pleased to see that, while people are concerned, checking on their balances, they aren’t exchanging as a knee-jerk reaction to headline news," Ward says.
Retirement Plan Participant Activity (2006-2015)
For periods July 25-August 15 each calendar year
Source: T. Rowe Price Retirement Plan Services. Transactions consist of loans, withdrawals, and exchanges. We focused on exchanges because that was the activity that significantly increased. Loans (generally 0.7% of the base) and withdrawals (generally 0.3% of the base), were not shown to be correlated to the market environment.
What We Learned From the Past
As mentioned previously, we saw some reactionary behavior to market swings in 2011 between July 25 and August 15 when the markets fell sharply over the European debt crisis and when U.S. credit was downgraded.
Over this period, transactions were substantially higher compared with the average of that same time frame from 2006–2015. However, that spike only accounts for 2.6% of the participant base.
Exchange activity was 44% higher, with approximately 30,000 participants making exchanges. Those age 50 to 64 were the most likely to exchange.6
As we would expect, about half of exchangers moved to more risk-averse investments, with the largest proportion going from stocks to bonds. A quarter of the exchangers moved to risk-seeking investments, with the largest proportion going from bonds to stocks.
"Considering the age of those exchanging who weren’t fully invested in target date investments, going from stocks to bonds might have actually been a good thing. This market event could have served as a wake-up call for those who might have been overweighted in stocks," Ward says. "What was even more surprising was that very few of those exchanging (around 10%) moved their assets into cash or money market vehicles. This showed that people didn’t go to the extreme and flee the market in droves. We also saw some people who viewed the downturn as a buying opportunity and moved assets from bonds to stocks."
Exchanges by Age Group
Source: T. Rowe Price Retirement Plan Services. Participants as of 7/31/2011. Exchange activity between July 25–August 15, 2011.
An Opportunity to Engage
While market downtowns may cause anxiety, they afford the opportunity to engage our workplace investors.
When we interact with our plan participants, we find they are open to guidance, regardless of market climate. In 2015, we offered one-on-one phone consultations focusing on deferral rates and asset allocation to over 7,000 plan participants, targeting preretirees.7
More than half of participants took some type of action as a result of these conversations.
- 22% changed their deferral amount
- 37% adjusted their current or future asset allocation
- 89% of people who exchanged post-consultation chose a target date investment
- Of those who made an exchange, over one-third moved all of their money into target date investments
After these consultations, 71% of plan participants strongly agreed that they felt more confident in their financial plans.8
"Overall, this is a good news story. We're seeing that plan design can impact participant behavior, and participants don’t seem to be overreacting to market swings." Ward says. "When we do discuss retirement savings with our plan participants, they are more than likely to make changes for the better."
1 T. Rowe Price T. Rowe Price Retirement Plan Services data July 25, 2011–August 15, 2011.
2 T. Rowe Price T. Rowe Price Retirement Plan Services data combined averages during 21 observation periods from July 25, 2009–January 25, 2016.
3 T. Rowe Price Retirement Plan Services combined averages during 21 observation periods between July 25, 2009, and January 25, 2016.
5 T. Rowe Price client loyalty and satisfaction survey, administered by Forsee, March 1–17, 2016.
6 T. Rowe Price T. Rowe Price Retirement Plan Services, July 25, 2011–August 15, 2011.
7 T. Rowe Price one-on-one phone consultations with 7,123 active retirement plan participants, January 2015–February 2016.
8 Overall customer satisfaction for 2016 YTD.
This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.
The principal value of target-date investments is not guaranteed at any time, including at or after the target date, which is the approximate date when investors plan to retire. These investments typically invest in a broad range of underlying portfolios that include stocks, bonds, and short-term investments and are subject to the risks of different areas of the market. In addition, the objectives of target-date investments typically change over time to become more conservative.
The views contained herein are as of May 2016 and may have changed since then.
Price Perspectives are provided for informational and educational purposes only and are not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. This Price Perspective provides opinions and commentary that do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.
Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.
Past performance cannot guarantee future results. All charts and tables are shown for illustrative purposes only.
T. Rowe Price Investment Services, Inc., Distributor.