Participants in large corporate defined contribution pension plans now have the same high equity exposure as corporate defined benefit plans.
The employees pushed their equity exposure in their 401(k) and other defined contribution plans to 62.6% during 1996, compared with a 63% equity exposure by corporate defined benefit plans.
This is the first time the average asset allocation topped 60% for defined contribution plans included in the nation's 1,000 largest retirement plans, Pensions & Investments' annual survey of the funds shows.
The 62.6% allocation to equities in the corporate defined contribution plans, as of Sept. 30, was an increase of 7.5 percentage points from the 55.1% allocation a year earlier.
By contrast, the corporate defined benefit plans in P&I's top 1,000 had 63% of their assets in equities in 1996, vs. 62.4% in 1995.
One reason for the growth: As the stock market rises, participants don't necessarily rebalance their 401(k) asset allocations the way pension executives rebalance defined benefit plan allocations. Thus, some of the equity allocation gains could be due to pure market returns.
In addition, it appears participants moved money away from guaranteed investment contracts, with stocks being the beneficiary. Stable value/GIC funds held only 20.5% of assets in corporate defined contribution plans included among the 1,000 employee benefit funds, down from 28.6% in 1995.
(All statistics are as of Sept. 30, 1996; comparisons with previous years are as of Sept. 30 of those years.)
These are milestones in the defined contribution area. For years, investment professionals have lamented the low allocations to equities in defined contribution plans and the high allocations to guaranteed investment contracts and their successors, stable value funds.
The growth in defined contribution plans' equity holdings comes both from employer stock and non-employer stock.
Among the corporate defined contribution plans in P&I's top 1,000, 32.3% of total assets were in employer stock in 1996, up from 29.4% in 1995. And, 30.3% were in non-employer stock - the traditional domestic and international equity markets - in 1996, up from 25.7% a year earlier.
Some consultants were surprised at the increased allocations to employer stock.
Tom Pipich, investment consultant at Buck Consultants, Pittsburgh, said the increase might be caused by market value increases rather than additional, intentional allocations.
He said many companies with heavy company stock allocations tend to be growth-oriented, and that might have helped boost the value of their stock because growth stocks had better-than-average performance in 1996.
Regardless of the reason, Mr. Pipich said it would be a "mistake" for most plan participants to allocate any significant percentage of the assets they control to company stock.
Catherine Higgins, principal and national director of the asset consulting practice at Towers Perrin, New York, agreed defined contribution plans' overall allocation to employer stock appears excessive.
"It flies in the face of everything we know about diversification; from an investment standpoint there would appear to be a lot of risk of holding a large percentage in a single stock," she said.
Ms. Higgins pointed out the employer stock allocation has attracted the attention of government policy-makers and believes "at some point" there will be a voluntary pullback from company stock.
"Many companies are starting to recognize over the long term it is in the best interest of employees to modify the situation; they may start to put maximum (limits) on it," she said.
Terry Bilkey, principal at Yanni-Bilkey Investment Consulting, Pittsburgh, agreed. He said he wouldn't be surprised if employers started instituting voluntary caps on the amount of company stock in defined contribution plans before regulators get into the act.
Indeed, the use of company stock as a major asset class in defined contribution plans has come in for some criticism by government and industry leaders, who believe company stock might subject participants to unnecessary volatility and put too much focus on a single stock.
As for overall equity allocations in defined contribution plans, Mr. Bilkey said: "Everything we have told plan participants has been reinforced by this huge bull market in equities; they have taken the bait and now we are all geared up for the next cycle to get creamed again. It is set up perfectly, the money is in place for us to go through a cycle of underperformance," he said.
Mr. Bilkey said the market's run since 1982 has caused investors to either ignore or forget the statistics for the 15 years before that. Since 1982, the Standard & Poor's 500 Stock Index had a compound annual return of 16.8% and a range of annual returns from -3.2% to 37.4%; the worst five-year return during the period was 8.7% with a standard deviation of 12. But between 1967 and 1981, the S&P returned an average of 7.1%, with a range of annual returns of -26% to 37.2%, and the worst five-year return was -2.4% with a standard deviation of 17.6.
"Equity allocations are way out of line for many people in these plans, but they either haven't heard about what happened before this bull market started or they aren't being told.
"The 60% equity allocation probably isn't too far off what it should be for some, but I'm surprised it got there so quickly. And, it probably will continue to go up," he said.
He said if investment education programs have pointed out the differences in overall equity returns for the period before 1982, "people don't really buy into it because of the most recent 15 years."
Margaret-Ann Cole, defined contribution consultant with Kwasha Lipton, Fort Lee, N.J., said she expects participants to bail out of the equity market in the event of a severe and prolonged market correction.
