A new survey of 401(k) investors explodes the myth that plan participants are too conservative in their investment selections.
The Watson Wyatt Worldwide survey of 36,000 participants analyzed investments by age categories and showed a different and more appropriate pattern of asset allocation emerged than previously assumed.
In aggregate, the bulk of 401(k) assets are still held in conservative investments. The lion's share is held by older workers, who have had more time to accumulate savings. And appropriately, such workers tend to move into lower risk options because they are close to retirement.
For workers over 60, 85% of 401(k) assets were invested in fixed income; for workers between 51 and 60, 62% of plan assets were conservatively invested.
Younger workers selected more aggressive equity options far more often than older colleagues. For workers between 21 and 30, 53% of assets were invested in equity funds (not counting balanced funds) and 48% went to equities in the 31 to 40 age group. Only 13% of assets for those over 61 went to equities and 30% for workers aged 51 to 60. The study found that the portfolio allocation for a typical young 401(k) investor is close to the ideal suggested by most financial planners - 60% equities and 40% bonds.
NASHVILLE, Tenn. - The Tennessee General Assembly this session passed legislation which will add an employer match to the state's $110 million 401(k) plan.
Beginning Jan. 1, the state will contribute a $20 match for the first $20 an employee contributes to the 401(k) plan, the minimum possible. Employees can invest both contribution streams in any of three stable value and fixed income options, provided by Aetna Life & Casualty Co., Hartford, Conn.; Union Planter's Bank N.A., Memphis, Tenn.; and Great-West Life & Annuity, Englewood, Colo. Seven diversified mutual funds also are available from Fidelity Institutional Retirement Services Co., Boston, and the Calvert Group, Bethesda, Md. The same options are offered in the state's 457 plan.
About 7,000 of the state's 40,000 eligible employees now participate in the plan, said Deana Reed, director of deferred compensation. The intent of the legislation was to encourage state employees to save more toward retirement, and Ms. Reed said she expects a sizable increase in participation in the 401(k) with the advent of the employer match.
A full communications campaign is planned for the fall to encourage new plan enrollment prior to the commencement of state matching contributions.
SHORT HILLS, N.J. - Defined contribution sponsors deliberating over how many investment options to offer should take note: investors need to invest in more than three growth-oriented mutual funds to achieve diversification without being "closet indexers," according to research from PDI Strategies.
The firm looked at the correlation between returns on portfolios consisting of various numbers of growth funds and returns on a growth stock index.
Portfolios with four or more funds had returns similar to those of the index. But those consisting of just two funds were highly correlated with the growth stock index.
The study was based on five year compound-annualized returns of growth-oriented mutual funds in the universe of Lipper Analytical Services Inc.
NEW YORK - Loans are a common and very popular feature in the majority of 401(k) plans, according to a new survey by William M. Mercer Inc.
The survey found three of every four companies - 196 of the 260 sponsors polled - allow plan participants to borrow against their assets, and 97% of those sponsors report their plans have loans outstanding.
More than 60% of the sponsors surveyed said the loan feature is very important in attracting plan participants.
Executives at the companies that don't offer loans were evenly divided among those who said it is contrary to plan philosophy and those who want to avoid the administrative burden. Only 3% said employees are not interested.
The survey found $1,000 was the minimum loan amount offered in 78% of the companies; 60% of companies charge fees for loans; and 65% of the companies limit employees to one outstanding loan at a time.
The poll also found only 11% of companies offer automated loan applications, mainly by phone; 37% use a combination of voice-response systems and paper applications; 52% uses only paper forms.
SAN FRANCISCO - Charles Schwab Corp. acquired TrustMark Inc., Charlotte, N.C., part of Schwab's continuing assault on the defined contribution plan market.
TrustMark provides daily record-keeping software for 401(k) plan administration to 318 clients such as banks, third-party administrators, mutual fund companies and corporate employee benefit departments. Its flagship program, MBA/3Daily, supports 11,000 retirement plans, with 2.6 million participants and $34 billion in plan assets.
Schwab has been attacking the defined contribution plan market so far through strategic alliances with benefit consulting firms such as Coopers & Lybrand, New York, and Milliman & Robertson Inc., Dallas. Investment management options include any of the more than 900 mutual funds in the Schwab Mutual Fund Marketplace; 500 of the funds are available without fees to plan sponsors through Schwab's OneSource bundled 401(k) service.
But Schwab officials also have their eyes on the more than 5,000 regional third-party administrators that provide record-keeping services to small and midsized defined contribution plans.
"We thought we could find a natural ally using electronic linkages to make daily valuation both easier and faster for a (third-party administrator). And, we'd give their clients access to a vast range of investment options," said John Philip Coghlan, executive vice president of Schwab Institutional, "the division providing services to institutional clients."
The TrustMark acquisition will provide Schwab with the means to standardize record keeping and administrative software.
TrustMark's 66-member staff and operations will remain in Charlotte and will continue to offer software support for clients who are not using Schwab's services. In addition, Schwab will maintain its larger alliance relationships without requiring they use TrustMark systems.
JEFFERSON CITY, Mo. - The state of Missouri is implementing a new 401(a) plan Jan. 1 to accept a $25 monthly contribution the state will make to every employee enrolled in the state's existing 457 plan who is making a minimum $25 contribution. There is no enrollment process and the state's contribution will be automatically directed to the same investment option in the same proportions as the employee's 457 plan. Funding for the new plan is for six months, initially, from January 1996.
The state contribution to the 401(a) is subject to annual approval by the General Assembly and the governor. The amounts will vary according to the discretionary budget appropriation, said a state official. The General Assembly passed enabling legislation two years ago, with the intent of encouraging more employees with an employer match incentive to participate in the 457 plan and take more responsibility for retirement savings.
WASHINGTON DEPOT, Conn. - Investors Press Inc. published a new book, "Building Your Nest Egg With Your 401(k)," by financial reporter Lynn Brenner.
Billed as "a guide to help you achieve retirement security," the book is a clearly written, well-organized treatment of all aspects of 401(k) plan participation and investing, especially for the plan participant.
The guide provides employees with a basic grounding in investment principles. The book is generously illustrated with plenty of color graphs, charts and examples of text topics. Especially eye-catching are the graphics which chart the growth of a dollar over time or the ravages of inflation on retirement assets. The book rather cleverly uses a bright pointer graphic at the end of certain sections, directing the reader to related topics or more in-depth discussion elsewhere in the book.
Another clever feature of the book is the addition of a summary section, Smart Pills, at the end of each major investment chapter.
Unlike some guides of its ilk, "Building Your Nest Egg" also discusses tax consequences of a participant's actions, the need to rebalance allocations depending on life changes, and has special sections which provide answers to commonly asked questions.
Investors Press will customize the book's cover with a plan sponsor's corporate logo and has special bulk rates available for employers. The book also will be distributed through book stores and libraries.
NEW YORK - Scudder Funds signed an agreement with State Street Brokerage Services Inc., Boston, through which defined contribution participants leaving their jobs or retiring can have the company stock portion of their distribution liquidated easily and at a low cost and sent directly into a Scudder IRA. In 1994, a quarter of all U.S. retirement plan assets were invested in company stock, according to Access Research.
Rolling over a lump-sum distribution into a qualified IRA within 60 days spares the investor a 10% penalty charge (if they are under 59 1/2 years of age) and a 20% government-mandated withholding penalty.
Scudder IRAs charge no maintenance or custodial fees.
Marlene Givant Star
MENOMONEE FALLS, Wis. - Strong Capital Management introduced five Strong Variable Insurance Funds for variable annuity and variable insurance programs. Each is a clone of an existing Strong retail mutual fund. The new funds are the Advantage Fund II; the Government Securities Fund II; the Asset Allocation Fund II; the Growth Fund II; and the International Stock Fund II.
