NEW YORK -- What do defined contribution plan executives and service providers have in common with Dr. Seuss? Their work was showcased at Pension & Investments' 8th Annual Defined Contribution/401(k) Conference, Jan. 26-27.
"I'm going to be kind of like the Grinch, I guess," said Arnold S. Wood, president and chief executive of Martingale Asset Management, right before reciting a Dr. Seuss poem about popovers.
"To eat these things . . . you must exercise great care," Mr. Wood recited as an illustration of a popover beamed from the overhead projector. "You must swallow down what's solid but you must spit out the hot air."
"I'm here to try to sort out the hot air and what is solid in terms of investor behavior and 401(k) participants and their choices, and the way they make their choices," Mr. Wood said as he launched into an overview of academic studies on investor behavior.
As if on cue, Dallas L. Salisbury, president and chief executive officer of the Washington-based Employee Benefit Research Institute, came on next and released the preliminary findings of an on-going joint project of EBRI and the Investment Company Institute in which they are collecting data on participants in 401(k) plans from record keepers and plan administrators.
According to this new study on 401(k) investment patterns, employer contributions in company stock affect participants' asset allocations. Just over 32% of the assets in these plans are invested in company stock, as compared with 19.9% in plans offering company stock as an investment option but without directing that employer contributions be invested in company stock, the study revealed.
While less than 1% of the plans in the EBRI/ICI database have employer contributions in company stock, "company stock is a very dominant option in large company plans," Mr. Salisbury said. Just more than 29% of total assets in plans with more than 10,000 participants are invested in company stock, Mr. Salisbury noted.
Moreover, the study revealed participants in plans where the employer match is in company stock have greater overall exposure to equities. For example, 68.7% of participant 401(k) assets are in equity funds and company stock only; and 78.9% of assets are invested in equities in plans that offer a company stock match as well as other equity options.
In plans where employer contributions are not directed to company stock, the combined share of equity funds and company stock is 60.5%.
By comparison, 52% of the average defined benefit pension plan is allocated to total equities, Mr. Salisbury said.
There are individuals in their 40s and 50s who have made no voluntary allocation to equities, but because the employer match is in company stock, "they still have more money in equities than the average defined benefit plan chooses under professional investment allocation to put into equities," Mr. Salisbury explained.
The study also found that for all participants, 44% of total plan assets are invested in equity funds; and 19.1% in employer stock, 15.1% in guaranteed investment contracts, 7.8% in balanced funds, 6.8% in bond funds, 5.4% in money funds, 0.8% in other stable value funds and 1% in other investments.
Asset allocations in 401(k) plans are influenced by the investment options offered, the joint study concluded. Plans offering only equity, bond, balanced and money funds have the highest allocations to equities, the study results indicate. When a company stock option is included, the allocation to other equity funds is reduced, it stated. GICs added to the four basic options lowers allocations to all other investment options, with the greatest impact on bond and money funds, the study noted.
The report given by Mr. Salisbury included only 1996 information -- the first year for which data was ready for analysis -- covering 6.6 million active participants in plans holding close to $246 billion in assets. This reflects just 31% of the assets in the universe of 401(k) plans and 18% of all participants, Mr. Salisbury noted.
Another highlight of the conference was an all-star advice roundtable moderated by Alfred R. Ferlazzo, president of Investcom, Ridgefield, Conn. The panel members were Carol W. Geremia, senior vice president of MFS Retirement Services Inc., Boston; Sherrie Grabot, senior vice president of TCW Group, Los Angeles; Jane Jamieson, executive vice president of Fidelity Institutional Retirement Services Co., Marlborough, Mass.; Jeff Maggioncalda, president and chief executive of Financial Engines Inc., Palo Alto, Cal.; E. Drake Mosier, chairman and chief executive officer of 401k Forum Inc., San Francisco; Brian M. Rom, president of Investment Technologies Associates, New York; J. Michael Scarborough, president and chief executive officer of The Scarborough Group Inc., Annapolis, Md.; and Matthew J. Saltzman, first vice president of Prudential Securities Inc., Hartford, Conn.
Opinions differed as to what actually constitutes advice. Ms. Geremia said that with the Department of Labor's interpretive bulletin, released after TCW obtained an exemption allowing it to give investment advice, a firm "can get away with a lot in terms of education."
"It allows us to get pretty close to what we thought was advice," she added.
Plans with extensive investment option choices need to provide some level of education, Ms. Geremia said.
"I definitely think participants need education, but I also think participants need advice," she said.
The issues will be whether participants act on the advice they receive and whether they get enough advice, Ms. Geremia said.
Mr. Scarborough, whose firm has given investment advice to individuals for 12 years, echoed the call for advice.
"Participants usually make their selections when they first join the company and then leave their head in the sand for 30 years and hope like hell they have something at the end," Mr. Scarborough said.
Mr. Mosier took a different tack, contending plan sponsors could be held liable for not giving advice.
"What do you think will happen if half of the money is invested in one security?" he queried. "You know they are not investing appropriately. I submit to you that there is a risk in not providing advice."
The conference also included case studies on some innovations by plan sponsors. Dennis Shea, vice president of total compensation of UnitedHealth Group, Minnetonka, Minn., explained how the company switched to an automatic enrollment plan design last April. Under the plan design, newly hired employees automatically are enrolled for a payroll deduction unless they elect not to participate.
Under the Internal Revenue Ruling 98-30, which was released last May, such so-called negative election contributions are permissible where employees have "effective opportunity" to elect to receive cash instead, Mr. Shea explained.
"This means that the initial payroll period becomes critical," he said. "It also means delivery of an employment offer letter prior to the start of employment, with a waiver form, is critical."
Under UnitedHealth's plan, the pre-tax salary contribution is 3%. The plan has nine investment options with a money market fund as the default option, he said.
UnitedHealth decided to switch to automatic enrollment because the company's participation rate had hovered around 50%, growing to 58% as of Jan. 1, 1998, Mr. Shea explained. Since April 1, 1998, when the company changed to automatic enrollment, about 89% of new hires are participating in the company's 401(k) plan, he added.
The company now is considering a new default fund based on the inertia of participants who have not moved from the initial default option, he said. Under consideration is a mixed or life-style asset allocation fund, Mr. Shea said.
