The average participant in a defined contribution plan managed by Fidelity had a record high equity exposure of 75% at the end of last year. At Vanguard, that average was 73%.
"Equity fund exposure is at an all-time high, while bond exposure is at an all-time low," said Paul Heller, a principal who heads the full-service business for The Vanguard Group Inc., Malvern, Pa.
Both Vanguard and Fidelity Investments, Boston, recently released statistics on corporate plans. They show:
* Participants have larger account balances but not as large as expected.
* Employees are using the Internet to access their accounts but not to make transactions.
Equity investment in Fidelity run plans was up two percentage points from year-end 1998.
Vanguard saw a marked increase in participants selecting equity funds in 1999 compared with three years earlier.
At year-end 1999, 55% of assets in plans run by Vanguard were in equity funds, excluding employer stock; compared with around 40% in 1996. Another 13% of plan assets were allocated to company stock in 1999 and 11% was allocated to balanced funds that were half equities, half bonds, Mr. Heller said.
This means the average participant in a Vanguard managed plan had about 73% invested in stocks and 17% of assets invested in money market funds, he said.
What will they do?
But the question is the "staying power" of the equity allocations when the market goes down, Mr. Heller said.
"Will participants do the wrong thing when the market drops? Will they move away from equities and will we see all of them move to bonds?" he asked. "Boy, that would be a disaster."
At Fidelity, the funds most frequently added to defined contribution plans are international equity and lifestyle portfolios, said Peter J. Smail, president of Fidelity Institutional Retirement Services Co. However, lifestyle funds attract only 2% to 5% of plan assets, he said.
Vanguard plans are adding life strategy funds, which are based on a risk profile, Mr. Heller said. However, these funds have attracted less than 10% of plan assets.
In 1999, the most popular investment options were large-cap stock funds, often growth, because "that's where all the performance has been," he said.
Less has been invested in small-cap and international funds at Vanguard, a trend related to returns, Mr. Heller said.
On company stock
According to 1998 Fidelity data, large plans have greater concentrations of assets in company stock than do smaller plans. However, large plans have slightly smaller allocations to short-term fixed income and international equity than do smaller plans and larger allocations to stable value.
Among plans that offer it as an option, company stock makes up an average of 28% in large plans, 26% in plans with between 500 and 2,499 participants and 21% in small plans, according to the Fidelity data.
In all plans that offer domestic equities, 50% of assets in large plans, 62% in medium plans and 68% in small plans are in domestic equities, excluding company stock. Among plans that offer international equities, about 3% of the money in large plans, 4% in medium plans and 7% in small plans is invested in that asset class; and blended investments account for 12% of large and medium-sized plan assets and 14% of small plan assets for those plans that such options, the Fidelity data stated.
Most Vanguard plan sponsors offered between 10 and 12 investment options last year, Mr. Heller said. At Fidelity, 59% of plan sponsors offered between seven and 10 options.
"Participants only use between three and four funds and that is not increasing," Mr. Heller said. "Companies are offering more options but people . . . are not thinking about increasing their" options.
The trick is to invest more time in educating plan participants so they have appropriate asset allocations for their ages and circumstances, Mr. Heller said.
"I'm certain there are a large number of people that have wildly unrealistic expectations," he said. "I often hear people expect to get in excess of 15% to 20% annually."
Participant endurance will be an issue during bad years that bring returns down to more historic levels, he said, especially since cash flow follows performance. Assets generally flow out of funds that suffer a bad performance year, a trend that can further hurt returns, Mr. Heller noted.
But Fidelity's Mr. Smail was more optimistic about participant behavior. "Look at asset allocation by age group and it does show participants know what they are doing," he said.
Fidelity's study revealed that most participant movements of assets between investment options for plans Fidelity services are driven by participant planning cycles, including receipt of account statements, tax filing time and such plan administrative actions as addition of new funds or completion of a corporate merger.
During short gyrations in the stock market, most participants stay put, he noted.
For example, on six of the 10 days in 1998 with the biggest absolute increase or decrease in the Dow Jones industrial average, participant movements of assets were above average, the Fidelity study indicated. The movements were below average on four days.
Less than 1% of all participants made an exchange on those 10 days and of those who did move assets from one fund to another during the year, 3% made an exchange during the 10 days of market movement, the Fidelity study indicated.
On Aug. 31, 1998, when the Dow dropped 513 points, its biggest one-day loss of the year, 0.46% of participants made exchanges, compared with 0.26% of participants on an average day. And while 1.08% of those who do move their money during the year do so on an average day, 1.94% exchanged their assets on Aug. 31.
By comparison, the vast majority of participants make exchanges rarely, if at all, the study indicated. Seventy-six percent made none in 1998, 14% made one exchange and 4% made four or more exchanges, according to the Fidelity study.
On account balances
The average account balance industry wide is about $38,000, according to a 1999 study by Cerulli Associates Inc., Boston. However, the average account balance among plans with 10,000 or more participants is close to $55,000, the Cerulli study indicated.
At Vanguard, the average account balance is about $59,000, compared with $60,000 at Fidelity, the firms' numbers revealed.
"Why isn't that number even higher," Mr. Heller queried. "Five or six ago the average account balance was $25,000."
The reasons average account balances are not higher are that companies are growing and adding lower-paid employees, he said. At the same time, the work force is aging and people with high balances are rolling over their assets into other vehicles, Mr. Heller explained.
And the averages are misleading, he said. About 40% of participants have a balance of less than $10,000 in their plans. The median balance is around $15,000, he said.
Average account balances also vary with plan size, Fidelity's study revealed. Plans with assets of less than $1 million have average balances of $8,000, while larger plans -- with $10 million to $50 million in assets -- have average balances in the range of $30,000. However, average balances are around $89,000 in plans that have more than $500 million in assets.
On mergers and acquisitions
Fidelity has created a dedicated unit that specializes in plan mergers and spinoffs, Mr. Smail said.
"That part of the business has grown by leaps and bounds over the last five years," he said. "It mirrors what we see going on in corporate America."
Plan sponsors see a "fair amount of activity" in merging plans or spinning them out, he said.
"We feel the need to wall them off and keep them separate," he said. "You need a great deal of expertise. It looks similar to the implementation process but it is more complicated because of the parties involved."
On the Internet
More than 95% of plans and 97% of participants that use Fidelity as their service provider have access to their defined contribution accounts through the Internet.
Twenty percent of the online contacts were transactional, the data revealed.
However, participants still prefer to speak with representatives for transactions such as exchanges or loans.