Employee investment education programs appear to be working, as 401(k) plan participants stick to their asset allocations and hold tight in the midst of confusing, volatile domestic and international stock and bond markets.
Consultants and mutual fund officials report little movement out of stock and bond funds toward more conservative investment options by individual 401(k) plan investors.
James Gately, senior vice president at the Vanguard Group of Investment Cos., Valley Forge, Pa., said participants made few changes to their asset allocations even in March and April, when the market dropped steeply.
Vanguard's call volume and transfer activity are 5% to 10% below company estimates for this period.
The only trend Mr. Gately has noted is isolated cases of employees working in troubled industries transferring out of company stock.
With daily valuation, instant access to their account balances and ready access to mutual fund performance information in the media, plan participants are well-aware of the effect dropping markets have on their assets. Short-term, market performance has been awful across most asset categories typically included as 401(k) plan options.
In the broad markets, the Standard & Poor's 500 Stock Index returned -4.76% for the six months ended June 30. The Lehman Brothers Government Corporate Bond Index returned -4.34% for the same period. These negative returns wiped out the gains of the second half of 1993, resulting in flattened growth for the year ended June 30 of 1.40% for the S&P 500 and -1.46% for the LBGC.
Tim Hankins, president of Wyatt Asset Services Inc., Minneapolis, found little difference in participant transfer activity between the first six months of 1994 and the last six months of 1993.
"I think it shows that investment education programs are really working. I don't think we'll see now, after two years of intensive participant education, the kind of wholesale bailout we saw in 1987 after that market crash. Participants know better now," said Mr. Hankins.
Mr. Hankins said some participants are becoming more conservative with their future contributions, directing them increasingly toward guaranteed investment contracts and balanced options, and away from aggressive vehicles. Even that trend isn't a big one, he said.
"I'm not sure what will happen if the market continues to stagnate. I think we may see more movement from participants who, despite their investment training, might not be able to stick out the bear market. But I still don't think you'll see a significant trend to conservative options," he said.
Many employee benefits consultants - like Hewitt Associates Inc., Lincolnshire, Ill. - are being asked by clients to beef up participant communications to reinforce a long-term investment outlook.
"Plan sponsors aren't themselves making any huge changes (in the options they choose to offer to participants) in response to the down market," said Jill E. Hill, a spokeswoman for Hewitt. "But they are intensifying communications efforts, reassuring employees about the long-term historical benefits of remaining invested in equity and bond markets."
Vanguard's own quarterly newsletter for plan participants has an article in the summer issue showing participants why a down market is really a buying opportunity, said Mr. Gately.
Plan sponsors are "under some pressure from employees because of the bad returns to legitimize their fund choices," said Anne Murdoch, a consultant in the Chicago office of Sedgwick Noble Lowndes.
Sponsors are providing more performance data to employees, comparing the returns of their funds to other defined contribution plans and to market indexes.
"By showing employees that everyone is having a hard time now and that, in fact, their fund options are enjoying better performance than the market as a whole, plan sponsors are providing the right reassurance. Employees are not panicking and are not moving their assets," said Ms. Murdoch.