MOST 401(K) CASH STILL GOES TO STOCKS DESPITE ASIAN JITTERS, MARKET SWINGS: ALLOCATIONS ARE OUT OF WHACK, EXPERTS FRET

If the meltdown in Asia and the potential for increased stock market volatility has had any impact on 401(k) participants’ behavior, it has not affected their appetite for stocks: Plan participants are directing an average of 60% of new contributions to equity investment options, according to a 1997 market update by Access Research of Windsor, Conn.

In addition, record stock market gains over the past three years coupled with growing contributions to equity funds have some vendors and financial experts concerned that individual accounts may need to be rebalanced.

But no tree grows straight to the sky, as Wall Street insiders never seem to tire of saying. While few market watchers are predicting a prolonged stock market downturn, most agree that a bear market will eventually occur, and the big question is how will participants react.

“Everyone asks me that,” says Shlomo Benartzi, an assistant professor of accounting at the University of California in Los Angeles and a recognized expert in behavioral finance. “But we can’t make predictions about what participants will do in a bear market.”

What Mr. Benartzi is comfortable saying: “There are a fair number of people in equities who don’t understand the risks. They bought equities because we told them to and (they) have failed to grasp the idea of diversification.”

too much stock

The danger? “People own more company stock than ever and have sold international stocks,” he notes. This “will make portfolios less diversified and make things bumpier for them.”

Only 13% of investors say they would move some or all of their investments out of stocks, according to a survey by American Century Investments of Kansas City, Mo., released in October, the month the market registered its largest one-day point drop in history. That analysis was essentially on target since shifting of assets in the wake of the market drop was minimal.

“In general, we found that the possibility of a future market crash isn’
t a major concern for most equity investors,” says Stephen Advokat, American Century’s manager of education and guidance.

Many plan providers agree with that assessment. “We have seen no change in investment patterns in the last three months into money market funds or bonds at all — people are ecstatic with the returns (in equities). We haven’t seen any rebalancing at all,” says Alex Nelson, managing director at Putnam Investments in Boston and director of defined-contribution client services.

Mr. Nelson says that at Putnam, close to 73% of new contributions are going into equity funds. Putnam has $32 billion in defined-contribution assets under management.

Robert Richie, senior vice president of investments at American Express Retirement Services in Minneapolis, has seen no change in investment patterns among 401(k) plan participants since midyear.

“From our point of view, what’s happening is that participants are beginning to learn about long-term investing and our participant education programs are doing a good job advising people that we are going to have these swings.”

He says current contributions are running at more than 50% into equities at Amex, which has $16.5 billion in defined-contribution assets under management.

time for a change

Tom Kmak, senior vice president and director of institutional marketing and services at American Century Investments, also says 401(k) plan participants have made little, if any, changes in asset allocation in the last three to six months. American Century has $8 billion in 401(k)-investment-only assets under management and $4 billion in full-service 401(k) record-keeping assets.

“I’ve not seen a lot of movement either way, which is not surprising,” says Mr. Kmak. “I’d like to see more calls to address the rebalancing issue — rebalancing back to target asset allocations. Because of the raging bull market in equities, if you had 60% in equities to start and are now up to 75% it may be a good time to bring it back to
your original target.”

Mr. Kmak says the uncertainty surrounding the Asian economic crises hasn’t noticeably affected plan participants’ investment patterns.

“(The impact of the Asian crises) is impossible to predict. It would be hard to recommend that someone get out of the equity market because of what’s happening in Asia,” he says. “Participants should consider their age, investment objectives and risk tolerance and make their decisions based on that, not on short-term market conditions.”

Crain News Service