IMHO: Some Wake-Up Call

August 23, 2001 ( - Were Cerulli's (k) plan statistics news to you?

» Double Dipping?
» Making A Difference

Some weeks ago, the major media networks were awash with screaming headlines that proclaimed the “news” that the assets in 401(k) plans had declined-for the first time ever. That news was based on a report from Cerulli Associates-one that actually had been published in early May, albeit to much less fanfare (one should never underestimate the appetite of a news-hungry editor in the throes of the summer doldrums).

The “news” was quickly seized upon by a variety of interests-each of whom found in that analysis evidence of his case-from the dangers of Social Security privatization to the need for financial advice.

Well, that was no news to most 401(k) plan participants or plan sponsors.

Of course balances dropped last year-and not because participants were ill-informed or unready to make prudent investment decisions, although both may have been true. To paraphrase: “It’s the market, stupid”-and it finally dropped enough to wipe out new contributions for the year.


Double Dipping?

Ever since the introduction of the 401(k), the industry has enjoyed double-digit rates of growth. In fact, as recently as 1997, Cerulli reported a 29.7% growth rate in assets. In 1999, the assets were still growing at a 13% clip-after more than a decade. And, despite the 4% dip in 2000, Cerulli projects a 15% rebound in 2001-and an average of about 11% from now until 2006.

So, what happened last year? Constricting legislation limiting contributions and hindering new plan development? Perhaps. A growing interest in nonqualified plan alternatives to reward the highly compensated? In some cases, no doubt. And, maybe we have reached a level of product maturity where we cannot count on swarms of new adopters. However, the key reason for the decline in 401(k) plan assets, I think, is a lot more obvious. It does not require a pursuit of Newtonian physics to appreciate that “what goes up, must come down”-at least eventually.


Making A Difference

Maybe professional advice could have improved the returns of some participants last year. I cannot deny that participants are frequently overinvested in company stock. Nor would I challenge the notion that, on more days than not, participants seem to be on “autopilot” when it comes to managing their retirement accounts (see IMHO, June). Some professional advice, properly followed, might have provided a greater cushion of diversity-or at least a higher level of comfort with the result.

But, for years, we have been telling participants that the markets could not go up forever-and pointing to that 1973-74 “dip” on the Ibbotson charts as proof. It finally happened-and, painful as it was to open that 401(k) statement, most of us are still much better off, even going back no farther than 1999.

Anytime there is a significant, sustained drop in the markets, investors will pay a short-term price. Cerulli suggests that nearly 80% of the net increase in 401(k) assets over the past five years was due to market appreciation. And a large number of ostensibly informed, engaged, and motivated investment professionals suffered much larger losses than the average 401(k) investor.

Moreover, the same demographics confronting the Social Security system are fast upon the 401(k) plan. While there is still more money flowing in than out, the ratio is nearly 3 cents out for every four cents contributed.

Those lucky enough to have the support of an active 401(k) communications program may not have been happy with the 2000 results-but at least they should not have been surprised.

We can leave that to the general media.

-Nevin Adams

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This article first appeared in the August 2001 issue of PLANSPONSOR Magazine