Time for a refresher course in behavioral economics—we blew it again. 401(k)s are generally praised for blunting some of the bad behavior investors self-inflict during periods of market volatility, but that wasn’t the case recently, according to Aon Hewitt.
The human resources consulting firm’s 401(k) Index tracks the 401(k) trading activities of 1.3 million participants, representing nearly $160 billion in collective assets. Data from the Aon Hewitt 401(k) Index shows trading activity in 401(k) plans was “markedly higher on Friday, August 21, 2015 and Monday, August 24, 2015 following noteworthy market drops.”
Specifically, Friday’s trading activity was two times the normal level, while activity on Monday was seven times the normal level, the third highest day of trading since 2008. Aon Hewitt saw activity return to more “normal” levels since then.
Preceding Friday’s market drop, the Aon Hewitt 401(k) Index showed no days of above normal trading in July or the beginning of August.
The trading movement on Friday and Monday was (of course) out of equities and into fixed income.
According to the company, index in created by incorporating the following four-step process:
- First, Aon Hewitt computes the total amount of money moved by participants between 13 asset classes on a daily basis (activity level). In this process, it counts the dollars moving between asset classes only once (dollars are counted moving into and out of self-directed window; but transfers within self-directed window are not counted). Each of these amounts is then restated as a percent of the total dollars (the day’s beginning balance) in all 13 asset classes.
- Next, Aon Hewitt computes an average of these daily numbers for the last 12 months, starting on August 1, 1997 and up to the day before the index is computed. This average represents “normal” activity and is computed on a rolling basis, changing daily as the index moves forward.
- The Aon Hewitt Index represents the ratio of transfer activity on a given day relative to the average computed in step No. 2.
- Finally, Aon Hewitt adds a directional indicator. An “eq” following the index indicates the majority of money on that day flowed into equity funds (and out of fixed income funds), while an “fi” delineates the opposite–over half of the money transferred that day moved into fixed income funds and out of equity investments (it does not include the direction within self-directed window).
