Table of Contents | Published in April 2000

Slicing The Pie

Showing participants how

By Judy Ward | April 2000

Showing participants how

» Participants' many faces
» Getting the knack?
» What sponsors can do

Kathleen Berman could use some help.

Berman, a workplace intervention manager at U S West in Denver, likes to keep abreast of her 401(k)'s standing. She enjoys perusing The Wall Street Journal for investment ideas and calls in about her account balance and funds' performance several times a month. "I am watching it all the time," she says. Berman—whose balance is divided among three equity funds focused on global technology, US technology, and U S West stock—would also like some guidance on asset allocation issues such as whether or not she should move out of a fund. "I like the personal contact," she says, referring to phone conversations about her account. "If our plan offered advice, I would be calling with all kinds of questions."

A prolonged bull market has highlighted the importance of asset allocation issues. Amid the frenzy, a good many participants have dived headlong into equities, but failed to rebalance their portfolios. About 75% of those included in a study of year-end 1998 data by the Employee Benefit Research Institute and the Investment Company Institute had not changed their equity allocations in the previous two years, says ICI senior economist Sarah Holden in Washington. "A lot of people do not pay much attention to it," adds Amy Heiserman, a Denver-based principal at William M. Mercer, who notes that it is important to review one's allocation annually. "Otherwise, you can really get the initial asset allocation mix out of whack."

Then again, equities' steep climb has sometimes had a very different effect on participants. "Others make changes too frequently: They are moving their money every week or every month," Heiserman says.

"In general, you do not want market timing," EBRI President and CEO Dallas Salisbury says, since few individuals can do that successfully. "You get into a Catch 22: Would you rather that people be market-timers or have the wrong asset allocation? Maybe you are better off being the individual who just leaves well enough alone, if the alternative is trying to outguess the market."

The stakes are high, especially since, "for a lot of people, their 401(k) balance is the largest asset they have apart from their house," says Walt Bettinger, chief operating officer and senior vice president of retirement plan services at San Francisco-based Charles Schwab.

David Wray, president of the Chicago-based Profit Sharing/ 401(k) Council of America, believes that participants have made a lot of progress with asset allocation. Sponsors are refining their tools and providing more detailed quarterly statements, for instance. "I do not know that it will ever be enough," he says. "We all have work to do, because we do not have 100% (of eligible employees) in and saving adequately."


Participants' many faces

Participants tend to fall into four categories, each requiring different asset allocation tools, Wray says. A small group of investing aficionados wants little or nothing. A second group wants to make its own investment decisions, but also likes to get educational support such as computerized modeling programs. A third group wants to be told how to allocate assets, and needs outright advice rather than just education. And a fourth group feels it cannot do anything with its asset allocations, and likes lifestyle funds. Wray estimates that the second group is the largest, including about 60% of participants.

"There is so much more awareness now, and there are so many more tools such as Web-based modeling," Heiserman says. "But, I am not sure that people always understand what to do with all that information." Employees may be confused about issues such as how much retirement income they need from a dollar—rather than percentage-of-pay—standpoint, how to actually move their money to match the optimum portfolio an online modeling tool suggests, and how life-cycle funds work.

A participant's approach to asset allocation has much to do with personal style, of course. Jerry Keating picked four equity funds for his 401(k) after reading the prospectuses of the options offered by his employer, Ridgeland, Mississippi-based Southern Farm Bureau Casualty Insurance Company, and he likes keeping track of his account on the interactive Web site of the plan's supplier, American Express. "I have enjoyed it," says the regional claims superintendent. "Granted, the market has gone up in historic proportions, but it has been interesting."

Southern Farm Bureau's Bill Crosswhite, on the other hand, made his allocation decision after attending a presentation and hearing about the American Express Trust Long-Term Horizon Fund, a lifestyle fund that does the diversification for him. About 75% of his balance is invested in the fund, which, in turn, puts the money into areas such as growth and foreign funds and a bond fund. "I did not want to have a bunch of different funds," says the investment accountant. "I like the way it is all spread out and I do not have to track every single thing that happens."


Getting the knack?

Participants are getting better at asset allocation, evidence indicates. Almost three-quarters of 401(k) plan balances are invested directly or indirectly in equities, according to information compiled by EBRI and ICI and released in January.

The breakdown: 49.8% in equity funds, 17.7% in company stock, 11.4% in guaranteed investment contracts, 8.4% in balanced funds, 6.1% in bond funds, 4.7% in money funds, and 0.3% in other stable value funds. In all age groups studied㬐s, 30s, 40s, 50s and 60s—equities are the most commonly held asset. The EBRI/ICI study is based on year-end 1998 data on 7.9 million active participants in 30,102 plans with about $372 billion in assets.

A Hewitt Associates survey of 401(k) plan sponsors released in January provides some explanation for the move toward equity funds. The average number of investment options offered in a 401(k) plan grew to 11 in 1999 from eight in 1997. Large-cap equity funds were the most commonly offered option at 78%, up from 61% in 1997. And the number of plans that provide investment education to employees rose dramatically to 86% in 1999 from 59% in 1997. Of 470 plans that reported their number of eligible participants to Hewitt, the median size was 3,540.

The situation is far from perfect, however. Asked by Hewitt in the summer and fall of 1999 what investment mistake 401(k) participants most commonly make, 20% of sponsors surveyed cited inadequate diversification. While the Hewitt survey found that the number of funds offered by plans continues to grow, many participants remain concentrated in just a few classes such as large-cap stocks, says Lori Lucas, a 401(k) consultant at Lincolnshire, Illinois-based Hewitt. "Participants are getting more opportunity to diversify, but they are not taking advantage of it," she says. "This is not the easiest market in which to explain the principal of diversification." Many participants are swayed by results posted in the past several years. "They say, 'Why should I be in an international fund when US large-cap stocks are doing better?'" Lucas says. "Alternately, some say 'I am overwhelmed: I do not know what to invest in, so I am going to pick something that sounds familiar.'"


What sponsors can do

Sponsors can take several steps to help participants improve their asset allocation, sources say. Give them tools—such as a worksheet or modeling software that encompasses factors like projected benefits from all their employer plans, spouse retirement income, and expenses—to calculate the target amount they will need for retirement, which may jar them into action. Provide them with investment education materials at least quarterly, such as a newsletter inserted into their quarterly statement, a Web site updated quarterly, and speakers or workshops. And personalize the material as much as possible, if not individually, then at least by age group. Personalized materials may include projected benefits from employer plans based on an employee's personal data, i.e., age, hire date, salary, and deferral percentage.

But how can sponsors avoid potential legal liability in trying to help participants? "Think of it as an ongoing, consistent activity," EBRI's Salisbury says. "Do not view it on a project basis," so participants will not end up arguing that "the first time [my employer] talked to me was just before the market crashed." Sponsors that highlight the benefits of equities only when the stock market hits an historic high, for instance, take a risk that the market will drop and participants will try to hold their sponsor responsible. As a result, more sponsors are thinking about hiring a third party to cross the line from investment education to outright advice. "Some employers have done a lot of education, but still some employees have not been reached," Lucas says "They may need something more." Twenty-seven percent of sponsors surveyed by Hewitt provide outside investment advisory services to participants or plan to do so in the next year, while another 37% say they may consider offering this service in the future. While the survey did not define the term "outside investment advisory services," it offered examples such as online advice and referrals to personal financial advisors.



  • "If our plan offered advice, I would be calling with all kinds of questions," says Berman.
  • Asked by Hewitt what investment mistake 401(k) participants most commonly make, 20% of sponsors surveyed cited inadequate diversification.
  • But how can sponsors avoid potential legal liability in trying to help participants? "Think of it as an ongoing, consistent activity," EBRI's Salisbury says.