Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, December 6, 1993 TAG: 9312040018
SECTION: MONEY PAGE: A-10 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Long
Employers say the most common mistake their workers make is investing their 401(k) account balances too conservatively.
And one of the most important effects of new government regulations is recognition that employees need more information on how to invest their savings.
These are just three of the findings from a recently released survey that asked 487 U.S. companies about their 401(k) plans and administrative practices.
The study, "401(k) Plan Hot Topics," provides considerable detail on issues in 401(k) plan design, communication, investment and administrative practices.
It was conducted by Hewitt Associates, an international firm of consultants and actuaries specializing in employee benefits and compensation programs.
Although the survey focused on issues of interest to employers in their role as savings plan sponsors, the study also provided a glimpse of how employees use their 401(k) plans.
In total, the surveyed plans had nearly $90 billion in assets and covered 3.3 million workers.
On a per-participant basis, balances in the accounts averaged $38,117.
The survey indicates that the number of investment options available to employees is increasing.
Employers offered an average of 4.5 investment choices this year. That's up from 3.7 in 1991 and 3.0 in 1988. In addition, more than one-fifth of the employers surveyed offer their employees six or more investment options.
Traditional equity investment options - growth and income, growth, or equity index funds - lead the list of fund types offered.
Eighty-nine percent of companies offer employees at least one traditional equity option. Also, funds balanced between stocks and bonds are offered by 48 percent of employers.
Guaranteed investment contracts, which are insurance company products with a fixed rate of return, are offered in 58 percent of the plans, while the employer's own stock is an option in 40 percent.
In term of asset mix, one-third of employee money in 401(k) plans is invested in guaranteed investment contracts, with another quarter in company stock.
David Veeneman, head of investment education services for Hewitt Associates, said it's not a value judgment that participants are making poor investment decisions.
"Rather, it is a question of whether all the money in what looks like the `safest' investment options got there for the right reasons - informed decision-making about time horizon until retirement, tolerance for investment risk and so forth," Veeneman said.
Guaranteed Investment Contracts pay only 1 or 2 percent above the rate of inflation, according to Donald J. Potter Jr., president of Financial Strategies, a pension and investment consulting firm in Roanoke.
That rate of return, Potter said, "is not going to get you where you want to be when you retire."
People saving for retirement need exposure to equities, he said, which have historically returned 7 percent after inflation compared to 3 percent for fixed-income investments.
To build a retirement fund, he said, "you need that extra boost.
Most people, he said, invest with too-short a horizon when they need to think long-term.
A good rule-of-thumb, Potter said, is for plan participants to limit fixed-income investment percentage to their age. Thus a 35-year-old would invest 35 percent in fixed income and 65 percent in equities.
Companies in the survey were questioned about the most common investment mistakes made by employees.
Half indicated they believed employees invested 401(k) balances "too conservatively" or without accepting the "appropriate" level of risk.
Another 14 percent worried about participants trying to "time" the market (reacting to fluctuations), 11 percent expressed concern about employees not diversifying investment adequately, and 10 percent were concerned about participants investing with too short-term a focus.
New rules regulating the diversification of investment options offered employees, called the 404(c) rules, have influenced employers to step up communication with their employees about investments.
Forty-two percent of employers indicated that they offer or plan to offer more in the way of investment information.
Other findings about 401(k) plans include:
On average, 25 percent of employees eligible to participate in 401(k) plans still do not do so.
Plans where employers don't match their employees contributions experienced a higher non-participation rate - 41 percent - than plans with an employer match, where the rate was 23 percent.
The overwhelming majority of employers, 86 percent, match pre-tax employee contributions to the plan - 29 percent even match employee after-tax contributions.
Almost three-quarters of plans allow employees to borrow money from their 401(k) account. On average, 21 percent of employees have a loan outstanding from their plan.
Directly rolling over 401(k) account balances to an IRA or another employer's plan when an employee leaves the company may not be occurring as often as might be expected.
by CNB