Statistics may vary on how much 401(k) plan participants have invested in the stock market, but one thing is certain: Investment education doesn't seem to be working.
Although employers try to educate their employees to avoid market timing and to invest for the long term, research shows participants' equity exposure increases when the market is up, and decreases when the market is down.
An analysis of 401(k) plans tracked by Hewitt Associates LLC., Lincolnshire, Ill., showed 401(k) equity allocations rose to 76.7% in 2000, then dropped to 68.4% in 2002. Research from Spectrem Group, Chicago, put the equity allocation ceiling at 62% - excluding balanced funds and brokerage account assets - in 2000, dipping to 50% last year.
Regardless, more than half of plans have asset allocations that "deviated significantly from an optimal equity investment level," according to a recent survey by Watson Wyatt Worldwide, Washington. Some 59% of plans surveyed by Watson Wyatt were overweighted in stocks, probably because participants didn't rebalance, the report noted.
Average balance down
Meanwhile, three years of a down market have hurt defined contribution plan participants. The average account balance fell 4% in 2001, a loss offset in part by continuing contributions, according to a March study of their collaborative database by the Employee Benefit Research Institute and the Investment Company Institute, Washington.
"In general, the more active traders have lower rates of return relative to the market," said Gregory D. Metzger, director of defined contribution consulting with Watson Wyatt in Los Angeles.
"What that's telling us is active traders are timing the market. They are emotional investors," Mr. Metzger said. Additional education and communication materials won't help these participants, he said, because "they think they know more."
Active traders aside, even those participants holding their asset allocation steady aren't necessarily doing so because they "got" the diversification message. "Asset allocation trends and asset allocation positions can be explained by changes in the market," Mr. Metzger said.
Trisha Brambley, president of Resources for Retirement Inc., a Newtown, Pa., consulting firm, agreed. "When I look at the asset allocation decisions, it seems to me people don't get it and, worse, they don't want to get it," she said.
"What I hear is that participants are putting statements in a drawer," Ms. Brambley said. "They don't want to look and think it's safest to do nothing. It's pretty sad."
In the beginning
Many participants make their first, and often only, asset allocation decision when they enroll in the plan. Not surprisingly, that's when the biggest batch of education pieces is thrown at employees, said Bob Noack, senior vice president and director of regional marketing for Columbia Management Group, Portland, Ore., the asset management arm of FleetBoston.
But they don't seem to be learning from what's thrown at them. "Participants who are making decisions around asset allocations are looking at the value of the funds that outperformed and are loading up on them. They are loading up on real estate and buying more bonds, and that's a mistake," Mr. Noack said.
What participants need to do, he said, is ensure their portfolios are appropriate for their risk tolerance and time horizon, and rebalance every year. "The major statistical tools to successful investment for participants are dollar-cost averaging, diversification and Modern Portfolio Theory," he said. "But if you bring it to the participant level, a lot of times after discussing Modern Portfolio Theory, participants will say: `I give up'."
A 2001 study by Brigitte C. Madrian, associate professor of economics at the University of Chicago, and Dennis F. Shea, head of executive compensation strategy and client services, Aetna, Inc., showed education often does not work.
Not much difference
In the study, employees were offered one-hour financial education seminars at work. Employees not enrolled in the 401(k) plan who attended the meetings all indicated they would be joining the plan. After the seminars, 14% actually enrolled. Some 7% of non-participants who didn't attend the seminars also enrolled.
Another 36% of attendees who already participated in their plan reported they would change their asset allocations, and 47% indicated they would change their fund selection. Following the seminars, 15% of attendees made changes to their fund selections, and 10% to their fund allocations. But, 10% of participants who did not attend seminars made fund changes, and 6% changed their allocation.
Clearly, experts say, participants need an easy way to let someone else make the decisions for them.
Vanguard Group Inc., Valley Forge, Pa., has changed the way it communicates to defined contribution plan participants. In its new Plain Talk approach, Vanguard combines a website, a calculator, print and online personalized profiles and simplified communication materials, said Bert Dalby, principal. The idea is to find out during the initial enrollment period whether a participant is comfortable making investment decisions or if the participant wants help. Those requesting help can get an array of advice options, from asset allocation and fund recommendations from Vanguard to online investment advice from Financial Engines Inc. and one-on-one financial planning from a Vanguard subsidiary.
In the past, Vanguard had used the usual set of investment materials that described asset allocation and dollar-cost averaging. The new "How to Enroll, Save and Invest" series is geared for employees with varied investment knowledge and is available online and in print.
Still, Mr. Dalby says that even in the worst bear market, defined contribution participants have been "surprisingly resilient."
"People have held their asset allocation and ... continued to put new money in those allocations," Mr. Dalby said. "Those who are planners got the message and are staying the course and, for the rest, inertia is working for us."
They need choice
Watson Wyatt's Mr. Metzger predicted that managed accounts, in which participants use independent firms to run their accounts, will become popular. He does not advocate managed accounts as the sole option, but participants should be given the choice to let someone else do it.
Mr. Noack said Columbia packages asset allocation selection with a risk tolerance test. Participants can choose a managed allocation portfolio or asset allocation funds or advice through Morningstar Associates LLC.
Ms. Brambley advocates a three-pronged approach that is often used today: strategic asset allocation funds; an array of options; and a brokerage option. More interested participants would be given a more broad-based financial education. The majority could choose a preferably low-cost strategic asset allocation portfolio, one in which the asset allocation automatically changes as they age.
"Part of the reason asset allocation funds have not taken off is really a communication problem," she said. "We say, `here, choose between 15 funds that you don't understand or five asset allocation funds made up of funds that you don't understand and mix and match to your heart's content.' "
"People are not going to study. They need to have their needs addressed in as simple a way as we can make it," Ms. Brambley said. "Otherwise, there will be a lot of poor old people who will be working until they're 105."