Some 401(k) investors moved to fixed income this week and may have missed rally

As the U.S. stock market is now on track for its best week since April, some 401(k) plan participants started the week making more trades than usual within their retirement savings accounts.

As a result, they may have missed out on this post-election rally. 

The amount of daily trading in 401(k) plans — traditionally seen as a place to buy and hold investments — increased significantly at the start of the week after a tumultuous few days for the S&P 500 index. On Monday, 401(k) investors who made trades mostly moved money from equities to fixed income. Yet a post-Election Day rally has put the major stock market averages on pace for their biggest weekly gain in about seven months. 

Investment activity in 401(k) plans was more than twice the normal daily average (or about 0.06% of balances) on the eve of the U.S. presidential election, according to 401(k) provider Alight Solutions. Investors mostly moved from equities toward fixed income on Monday, a recurring theme over the past several weeks. 

Although investment activity in 401(k) plans was near the normal daily average on Election Day and the day after, experts say this trading bears close watching. 

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"There's been a lot of uncertainty about who is going to be president and people take that uncertainty and they worry that, if Biden wins or Trump wins, something bad is gonna happen," said David Blanchett, Morningstar's head of retirement research.

"We don't actually know what's going to happen with the market, regardless of who's president," he added. "So it doesn't make a whole lot of sense to trade on the uncertainty that exists today." After all, a 401(k) account is an investment designed for long-term saving for retirement.

In tracking daily data of more than 2 million 401(k) investors, Alight found trading activity was lower on Monday than it was the day before the 2016 U.S. presidential election and the action has been calmer in the subsequent days too. Yet, daily 401(k) activity this week could still follow a trend that occurred four years ago. 

The outcome of the 2016 U.S. presidential election "was a shock to many, many people — the polls were wrong and the decision was swift," said Rob Austin, Alight's vice president of research. "People were reacting to the surprising news.

"However, in 2020, there was an expectation that this election could be a long, drawn-out process, which seems to be coming to fruition," he added.

"People might react to the decision instead of the voting," Austin said. "We could see more movement in trading once the election is decided."

In 2016, the biggest trading day in 401(k) plans — that year and of all time, at that point, according to Alight data — was the day after the presidential election, when a surprising outcome to many was made clear. Net trading activity on Nov. 9, 2016 was 4.5 times the normal trading level (or about 0.10% of 401(k) balances) with money flowing to fixed income. 

It's not certain whether that type of jump in 401(k) investment activity will happen once a winner is announced in the 2020 U.S. presidential election, but uncertainty is fueling the recent activity in some accounts, experts say. 

"Whenever there's an event of uncertainty or volatility, people tend to trade because they transfer their emotions to their 401(k) portfolio," Blanchett said. "And that's not usually a good thing."

After all, participants who moved some 401(k) money from equities to fixed income in November 2016 and kept it out of the stock market have missed quite a run. Since then, the S&P 500 has risen by more than 60%. 

Instead of trying to time the market, Blanchett says the 2020 election should be viewed as "a bit of a litmus test" for 401(k) participants. "Do you like your current portfolio?" he asked. "If you don't, you could be in the wrong one.

"Find one that you're comfortable staying in for the long haul, because moving back and forth in the markets tends to result in people having less wealth over the long term." 

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