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. Bermanwhose balance is divided among
three equity funds focused on global technology, US
technology, and U S West stockwould 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 dollarrather than
percentage-of-paystandpoint, 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
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 60sequities 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
toolssuch as a worksheet or modeling software that
encompasses factors like projected benefits from all their
employer plans, spouse retirement income, and expensesto
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