Morningstar Updates Findings on 2020 401(k) Allocation Decisions

April 24, 2021

A new paper by Morningstar updates previous findings exploring how 401(k) participants responded during the first quarter of 2020 to see what, if anything, changed over the course of the year.

The paper explores the allocation decisions of 520,556 individuals actively participating in a 401(k) plan during the 2020 calendar year. Participants are categorized into four broad groups based on whether they were self-directing their accounts, using a target-date fund, defaulted into managed accounts, or opted into managed accounts.

Overall, Morningstar found that participants continued to make small changes to allocations throughout 2020, but participant activity was more muted during the last three quarters, the firm reports in "Keep Keeping Your Distance: An Updated Look at 401(k) Participant Behaviors During the COVID-19 Crisis."

Within professionally managed investment options, managed accounts appeared to be slightly “stickier” than target-date funds during 2020. Default managed accounts had a 2.8% opt-out rate for the year, followed by a 3.1% opt-out rate for opt-in managed accounts, with TDFs having a 3.5% opt-out rate, the report notes. 

Participants who opted out of professionally managed investment strategies tended to be male and had higher incomes and higher balances. 

Self-directors

Self-directed individuals made more changes than investors using professionally managed solutions. Among self-directors, which represent 41% of the firm’s participant dataset, roughly 13% changed equity allocations by more than 5% (which Morningstar defines as an allocation change) and 16% had a shift in account balance greater than 5%. 

Participants self-directing their accounts who made allocation changes tended to move to more conservative portfolios, especially during the first quarter of 2020, where the average change in equity allocation was a 17-percentage-point drop. 

Morningstar notes that these participants likely suffered lower returns because of the reallocations. “We estimate the underperformance for reallocators to be roughly 750 basis points through the entire year based on average changes (versus participants who stayed the course),” explain authors David Blanchett, Tony Perrin and Diana Velasquez of Morningstar Investment Management. 

Other findings suggest that usage of professionally managed investment options varied significantly for newly enrolled participants throughout 2020, especially for older participants. “Older participants had the most notable drop in usage of professionally managed portfolios following the market volatility in the first quarter and the greatest changes in average equity allocations among self-directors throughout the year,” the researchers further state. 

Stay the Course 

Overall, Morningstar found that most participants stuck with their strategy through 2020, regardless of approach, which is consistent with the firm’s earlier research that focused only on decisions made during the first quarter of 2020.

In addition, the firm found that professionally managed investment options, such as TDFs and retirement managed accounts, were relatively “sticky” during the recent period of market volatility, especially when compared with the decisions of participants self-directing their accounts. 

According to the authors, the research “strongly suggests” that there is an additional value associated with professionally managed investment solutions for 401(k) participants, because participants using these options were less likely to make changes during the period of recent market volatility. Moreover, participants who were able to stay the course likely had better performance than those who transacted. 

“Since many participants, especially new participants, appear to have moved away from professionally managed options during 2020, plan sponsors should consider strategies to get these participants back into a professionally managed investment option, such as an investment re-enrollment,” Blanchett, Perrin and Velasquez emphasize.