Last year gave the nation's largest defined contribution plan sponsors a headache and their participants much heartache as plan assets dropped for the second year in a row, the first consecutive two-year loss since the birth of the 401(k) 20 years ago.
About 83% of the 98 corporate defined contribution plans among sponsors of the nation's largest 200 employee benefit plans lost money in the 12 months ended Sept. 30, according to Pensions & Investments' annual survey. A mere 16 corporate defined contribution plans had more assets on Sept. 30 than they did the year before. What's more, none of the top 10 corporate plans, and only one of the largest 20 corporate defined contribution plans gained assets in 2001.
By comparison, only about a quarter of all defined contribution plans reporting among the top 200 lost money during the period.
Heavy investment in the sponsor's stock does not seem to be the obvious culprit for the decline. Only three plans among the 10 largest - General Electric Co., Exxon Mobil Corp. and SBC Communications Inc. - reported having more than 50% of assets in company stock. (Three of the top 10 did not reveal the asset allocation). Most of the 20 largest corporate defined contribution plans, however, reported having at least 25% of assets in company stock.
While 28 plan sponsors reporting company stock allocations for both years indicated their plans lost money and decreased the percentage of assets in company stock, two plans gained assets as the percentage held in company stock dipped.
Overall, defined contribution plans offered by the nation's 200 corporate plan sponsors showed a drop in assets of 22% on a market-adjusted basis from the year before, and a drop of 13.7% on an unadjusted basis.
For all defined contribution plans reported in the top 200, assets gained nearly 6% on a market-adjusted basis while dropping 12% on an absolute basis. In the previous survey, overall defined contribution plan assets dropped by 0.3% on a market-adjusted basis and gained 11.3% on an absolute basis.
The adjusted number is based on the Russell 3000 index's -27.9% return in the 12 months ending Sept. 30; the Salomon Smith Barney Broad Investment Grade Bond index return of 13.1% for the period; and the 90-day Treasury bill rate of 5%.
Qwest Communications International Inc., Englewood, Colo., sustained the biggest drop in assets by a single plan, with a 48% decrease, to $3.7 billion, in its defined contribution plan. At the same time, the percentage of plan assets invested in company stock dropped 22 percentage points to 31% of plan assets from 53%.
Part of Qwest's decline could be attributed to fallout from its June 30, 2000, merger with US WEST Inc. As part of the merger, the long-distance business of the newly combined entity was sold to Touch America Inc. and in July 2001, $1.3 million in assets were transferred from Qwest's 401(k) plan to Touch America's 401(k) plan.
Few analysts were surprised by the declines in defined contribution assets.
Stock and company stock allocations fell in roughly the same proportion as the Standard & Poor's 500 index, or at least within one or two percentage points, said Don Bartolai, principal with Unifi Network, a Mellon Financial Co. unit. Bond allocations increased within five and seven percentage points of the indexes, he said.
"The chunk of the pie in company stock went down roughly the way other stock went down," Mr. Bartolai said. Public plans suffered less than corporate plans because they do not have company stock funds, he added.
Some of the statistics may be misleading because of company stock matching contributions, he added. "Companies with company stock funds usually have matches in company stock and so there is a guaranteed amount of money going into the company stock fund," Mr. Bartolai said. "So if, for example, a company stock fund may have gone down 10% ... what you do not see is that there is a 3% positive cash flow from the company match and the stock actually had a negative 15% in returns."
"I think we've seen a reduction in equity exposure, but for the most part asset allocations held fairly steady given the volatile market environment," said Chris Hemmer, consultant with Watson Wyatt Worldwide, Bethesda, Md.
What assets did move went to stable value and fixed income, he added.
"Some of our clients and plans in general had an overweighting in large-cap growth because that was pretty much the place to be through 1999," he said.
The result of the market's wakeup call is that overall participant portfolios are better diversified, Mr. Hemmer said. They are not so highly invested in aggressive stock funds.
"I think a lot of participants weren't aware of the risk that was in their portfolios because they rode the bull market in the 1990s and a lot did not rebalance and as a result their risk profile changed considerably," Mr. Hemmer explained. "Due to the bear market, participants weren't as comfortable in that (higher) risk profile but we did not see dramatic shifts in asset allocations."
Overall, according to P&I's survey, assets in both company stock and other equities dropped while money invested in fixed income and stable value increased, but there was no stampede to the safest investment vehicles.
It was the first time participants experienced negative returns, explained Bob Benish, vice president and manager of plan sponsor communications for Zurich Scudder Investments.
"It's one thing to talk about market volatility and another to experience it," Mr. Benish said. "It's like having children: until you experience it, you don't get it."
The bear market also is causing participants to pay attention to asset allocations, cost and retail-orientated practices, Mr. Hemmer said. This could cause more participants to ask for lower-cost, institutional vehicles rather than name-brand funds, he added.
Name-brand fund recognition is still important to a lot of participants, but many of these household names underperformed for the last couple of years, Mr. Hemmer said. This may cause participants to change their opinion of some of these funds.
Participants could seek investment vehicles with more disciplined and consistent management processes, he said.
"As opposed to funds where there is a tremendous amount of latitude in what they can invest in, and so participants are not always aware of the risk in the portfolio," Mr. Hemmer said.
Even if the stock market recovers, defined contribution plan participants may be shaky investors in 2002.
"I think 2002 will be a triple-A year. It will be governed by anxiety, (legal) activism and advice," said Zurich Scudder's Mr. Benish. "We all have a natural fear of the unknown and coupled with the fact that most people had a bloated expectation of their returns, (there) will be ... anxiety."