PLAINSBORO, N.J. -- Affluent 401(k) plan participants are more likely to make investment changes based on recent market conditions than on informed guidance or long-term investment goals, according to a new survey sponsored by Merrill Lynch Asset Management Group.
That's surprising to Merrill executives.
"Our conclusion is that short-term changes in the marketplace are driving people to make . . . changes in the plan. It is not the long-term focus we thought 401(k) plan participants should have with their retirement money," said Gregory D. Upah, senior vice president of the Plainsboro-based asset management group.
Merrill Lynch officials also studied the behavior of participants in the plans they service, finding 26% made investment changes during 1997. That grew to 50% in 1998 and 90% last year.
"This means almost every participant made a change in a given year," Mr. Upah said. "We do not think this was from 10% of participants trading widely. We think it is a more broad-based phenomenon.
"When we asked why they made a change in their investments, the biggest answer is they are reacting to market conditions."
Some 30% of participants who changed their investments in 1999 said they were reacting to market changes, 16% were not pleased with returns, 10% changed because of investing information received by their employers and 10% on the advice of a professional adviser.
At the same time, 401(k) participants are optimistic about the appreciation of their retirement plans: 71% expect to earn 20% or better on their 401(k) plans in the next five years.
By contrast, calculations by Merrill Lynch and Spectrem Group, a Windsor, Conn.-based consultant and research group that conducted the survey, predict the annual expected equity return to be 17% in the next five years. Moreover, the U.S. capital markets 80-year average return was 13.09%, according to Russell/Mellon.
Meanwhile, an informal poll of Merrill Lynch's plan sponsor clients showed they expect returns of 10% to 12% in the next five years, Mr. Upah said.
"Participants expect very very strong returns," he said. "Plan sponsors are much more realistic."
What plan sponsors should learn from the Merrill Lynch 2000 Poll is they need to keep participants focused on long-term investment goals while maintaining a selection of in-fashion investment choices to keep them satisfied, Mr. Upah said.
"People are more sophisticated, they have more money now and they are bound to be more demanding of plan sponsors," Mr. Upah said. "But plan sponsors need to respond to their requests by tempering participants' expectations and helping them to maintain a broad selection of funds to encourage well-conceived asset allocation."
Demographics of the survey of affluent (defined by household incomes of at least $75,000) participants broke down this way: Median household income was $100,000; median defined contribution assets were $60,000; and an average of 47% of total household financial assets were in the 401(k) plan.
Affluent plan participants are most satisfied with basic plan elements like ability to change investments and account information. They are least satisfied with employer-controlled elements such as company match and communications, the survey showed.
"We found the key driver of satisfaction was clearly investment performance and a greater predictor of participant satisfaction over the match," Mr. Upah said.
Opting for technology
When asked which investment options should be added to their plans, 37% wanted funds focused on specific sectors such as technology and health care.
"The investment du jour was the No. 1 choice," Mr. Upah said.
Plan participants were least interested in international equity, small-cap stocks, fixed income and emerging or developing markets, he said.
These findings are similar to those discovered by IBM Corp., Stamford, Conn., which polled the 5,000 participants in its $21 billion 401(k) plan last year.
IBMers said the most important attribute of an investment option was performance -- with 96% of respondents ranking it very or somewhat important.
Plan sponsors who want to help their participants reach their retirement goals should consider increasing their employer matches, expanding investment options and providing better retirement planning and investment information, Mr. Upah said.