If the meltdown in Asia and the potential for increased stock market volatility has had any impact on 401(k) participants' behavior, it has not affected their appetite for stocks, according to industry sources.
Equities are drawing participant salary deferrals as though market gains will continue to soar beyond 20% in 1998, as they have for the past three years.
Plan participants are directing an average of 60% of new contributions to equity investment options, according to the 1997 market update by Access Research, Windsor, Conn.
Record stock market gains over the past three years coupled with increasing contributions to equity funds has created some concerns among financial experts and vendors that individual accounts may need to be rebalanced now that the market seems to be in for a bumpy ride.
Most 401(k) plan providers claim there is little effort by plan participants to rebalance portfolios, which may now have unusually high equity exposures due to market gains.
401(k) investors stay put
Most major 401(k) investment vendors say there has been no major shift out of equities since October when a 554-point drop in the Dow Jones industrial average set off a series of 100-plus point swings in the market. Some 401(k) investment providers report equity exposure among plan participants has actually increased while market volatility is projected to increase in 1998.
Few market watchers are predicting a prolonged stock market downturn. Most agree that a bear market will eventually occur, and the big question is how will participants react. Hanging over the stock market is the question of whether defined contribution plan participants will stick with equities if the market moves from its pattern of wild one-day ups and downs into a sustained decline.
"Everyone asks me that question," said Shlomo Benartzi, assistant professor of accounting at The Anderson School at UCLA and a recognized expert in behavioral finance. "But we can't make predictions about what participants will do in a bear market, which seems like it is coming."
Mr. Benartzi said recent short-term market movements do not provide sufficient information on which to base predictions on participant behavior. "These short-term movements don't tell us much," he said.
"I only feel comfortable saying that there are a fair amount of people in equities who don't understand the risks and bought equities because we told them to and have failed to grasp the idea of diversification in the equity class," said Mr. Benartzi.
"In the old days, we told people that they were being too conservative. Now the question is when we told them to buy equities they seem to have taken it to the other extreme. This is not 1973-'74 when the market went down, and we didn't know when it would recover. Now, when the market goes down, it goes back up again.
"Right now, people own more company stock than they ever have and have sold international stocks which will make these portfolios less diversified and will make things more bumpy for them."
Only 13% of investors said they would move some or all of their investments out of stocks, according to a survey by American Century Investments, Kansas City, Mo., released in October, the same month that the market registered its largest one-day point drop in history. That analysis was essentially on target since shifting of assets in the wake of the market drop was minimal (Pensions & Investments, Nov. 10).
"In general, we found that the possibility of a future market crash isn't a major concern for most equity investors," said Stephen Advokat, American Century manager of education and guidance.
Many plan providers claim that, even with the three-year market runup, plan participants continue to expand equity exposure and may have drifted far from their original target allocation - if they had one to begin with.
"We have seen no change in investment patterns in the last three months into money market funds or bonds at all. People are ecstatic with the returns (in equities); we haven't seen any rebalancing at all," said Alex Nelson, managing director at Putnam Investments, Boston, and director of defined contribution client services.
"We have been advising participants not to panic with the volatility and stay with their long-term allocations," he said.
While the industry average is about 60% of new contributions going into equity funds, Mr. Nelson said that number is closer to 73% at Putnam.
Putnam has $32 billion in defined contribution assets under management.
no change in patterns
Robert Richie, senior vice president-investments, at American Express Retirement Services, Minneapolis, said there has been no change in investment patterns among 401(k) plan participants since midyear.
"From our point of view what's happening is that participants are beginning to learn about long-term investing and our participant education programs are doing a good job advising people that we are going to have these swings."
He said current contributions are running at more than 50% into equities at American Express, which has $16.5 billion in defined contribution assets under management.
Merrill Lynch Group Employee Services, Plainsboro, N.J., which has seen its 401(k) assets under management expand by $27 billion so far in 1997 to $72 billion, launched an automatic rebalancing program for its clients in June.
Edmund Martinez, director of investments, said 45 plans have adopted the optional automatic rebalancing program which "takes the emotions out of making decisions."
He said he has not detected any changes in investment patterns among the Merrill Lynch client base, adding that the market's upward movement may have pushed many participants beyond their target allocations to equities.
"Periodic rebalancing performs best in volatile markets," Mr. Martinez said. "We are expecting more volatility so periodic rebalancing is more important now in a volatile environment. People shouldn't be changing asset classes based on current market conditions but rather on their own long-term investment and time horizons."
Tom Kmak, senior vice president and director of institutional marketing and services at American Century Investments, Kansas City, Mo., also said 401(k) plan participants have made little, if any, changes in asset allocation in the last three to six months with most allocations still pouring into equities.
"I've not seen a lot of movement either way which is not surprising," said Mr. Kmak. "What I would like to see is more calls to address the rebalancing issue, rebalancing back to target asset allocations. Because of the raging bull market in equities, if you had 60% in equities to start and are now up to 75% it may be a good time to bring it back to your original target."
Mr. Kmak, and other 401(k) investment providers, claim the uncertainty surrounding the Asian economic crises has had no noticeable effect on investment patterns among plan participants.
Mr. Kmak said contributions flowing into equity funds at American Century is running between 75% to 80%. That represents an increase from the beginning of the year. Currently, only about 21% of contributions are going to non-equity investment funds compared with 30% one year ago.
"A lot of participants appear to be nervous but they are relying on the employer education programs to help them cope with that nervousness," he said.
American Century has $8 billion in 401(k) investment only assets under management and another $4 billion in full-service 401(k) record keeping assets.
