Background:

To better understand how DC participants respond to market volatility, with a particular focus on the attributes related to trading, I explored DC participant trading activity during the 2020 calendar year. The following is a summary of my findings.

Findings:

Age was the most notable demographic attribute related to transaction activity. In particular, older participants were increasingly more likely to transact, regardless of how they were invested. Older individuals also overwhelmingly moved to more conservative allocations.

The fact that older investors were more likely to transact is not necessarily intuitive. Older investors, in theory, should be “better” investors, since they have decades of experience witnessing firsthand the ups and downs of the stock market and have attributes that would generally suggest they are more financially sophisticated (e.g., have higher incomes). This is an effect I’ve documented in other research, looking at risk tolerance questionnaire (RTQ) responses during the Global Financial Crisis of 2007, and the effect is relatively robust.

Although we don’t know why older participants have been more likely to trade, one potential hypothesis is that the salience around retirement and the implications associated with a wealth shock increase as retirement approaches.

The good news: Older participants who delegated investment management (e.g., by using either a target-date fund or managed account), whether they were defaulted or opted in, had a significantly lower probability of trading. Therefore, the goal should be to get as many older participants as possible into a professionally managed investment solution. The challenge is that older participants are the least likely to want to use these options.

Bottom Line:

Trading activity during periods of volatility varies significantly by age, with older participants (i.e., those closest to retirement) being the most likely to react to market volatility (and make trades). This suggests older participants need professionally managed investment solutions, even though they’ve also been the least likely to use them. Therefore, DC plan sponsors and consultants need to pay special attention to this group to help ensure they stay the course during future periods of market volatility

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