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401(k) Investors Shifting To Conservative Funds


Storm-tossed stock markets and a cloudy economic outlook have 401(k) plan participants seeking safe harbors such as bond and stable value funds for their savings.

In reaction to flat or declining stock prices, 28% of plan participants shifted a portion of their retirement assets into less volatile investments such as bond and stable value funds in the second quarter, according to the Principal Financial Group, which surveyed 1,200 participants. This asset flow to stable value is double the rate of the first quarter, the Principal reports.

Hewitt Associates' 401(k) Index, which tracks the daily transfer activity of 1.5 million plan participants, finds that fund transfers to fixed income investments dominated transfer activity 15 of the 23 days in August in which transfer activity took place. Stable value investments experienced a 57% increase in fund transfers the first four months of the year, Hewitt says.

Despite the recent activity, plan participants remain bullish, with some 70% of plan contributions flowing to equity investments, Hewitt reports. Some 74% of all 401(k) assets are invested in equity funds, down from a high of 78% in August, 2000.

Long-term Confidence

The Principal interprets the continued flow of contributions to stock funds as market tolerance combined with long-term confidence in equity investments.

"The vast majority of American workers continue to remain very concerned about their financial futures, yet workers react in somewhat divergent ways, which reinforces the call for vigilant employee education," says Daniel Houston, senior VP at the Des Moines, Iowa-based Principal.

However, deciphering the motives of plan participants is often difficult, said Lori Lucas, a defined contribution consultant at Hewitt. The dominance of equity fund investments in 401(k) plans could also be the result of inertia, she points out.

"Participants don't tend to transfer funds in their 401(k) plans at all," Lucas observes. "When they are active, it tends to be when the market is high and returns are rising. As the exuberance has worn off, they tend not to do anything. They're adopting a wait-and-see attitude."

Many 401(k) accounts have become overexposed to equity investments due to the high returns on these investments relative to other asset classes. Unless the participant actively rebalanced the account, the returns would increase the total percentage of the account invested in equity funds.

The fear among plan sponsors that participants are too conservative in their 401(k) investments is no longer valid, according to Lucas. "The typical participant is not too conservative. In fact, by age group, allocations to equities are pretty uniform. Older participants may be overexposed to equities," she says. "There's a huge need to rebalance portfolios toward a target allocation model, so participants can be ready for market changes."

The participants who got hurt by the recent downturn are primarily those who had extremely aggressive growth investments and were planning to retire this year, observes David Wray, president of the Profit Sharing/401(k) Council of America in Chicago. These participants could be forced to sell when stock prices are low.

"There's a lot of unnecessary heartburn out there due to market volatility," Wray says. "Long-term retirement investors who have a good plan in place should ignore the volatility that's going on right now."

"If you're 25 years old, then it's guaranteed that you will see two or three more significant stock market downturns in your career," he continues. "This is not about market timing or reacting to market volatility. You should make a long-term asset allocation and then move on."