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401(k) Participants Get Education, Do They Need Advice?

A significant recurring theme, first at the Profit Sharing 401(k) Council annual Idea Exchange held in San Diego in September and then again at the Stable Value Association National Forum held in Washington, D.C. in October, was the subject of investment advice, not simply investment education or communication. Three years ago, these same and similar conferences devoted a great deal of time to the then latest communication and education techniques being promoted by various vendors and the seemingly successful programs that had been conducted by certain forward thinking plan sponsors. Why has the emphasis shifted?

Periodically, John Hancock conducts a survey of defined contribution plan participants, the most recent of which was completed in January 1999. The survey included questions on participants' knowledge of investments, perception of investment risk, preparation for retirement, and reactions to recent events. Some of the observations from that survey are as follows: The amount which respondents believe should be invested in stocks has risen significantly since 1993 from 38% to 47% in 1999. In theory, participants recognize that stocks are relatively risky having ranked domestic stocks at 3.7, money market at 2.4, and stable value at 2.0 on a scale from 1 (low risk) to 5 (high risk), and 85% agreed that it was possible to "lose money investing in stocks." However, when asked what types of investments are included in a money market fund, 49% said bonds and as many as 41% said that stocks were included! When asked the best time to transfer money into a bond fund, 36% said when interest rates are expected to increase, 22% said they didn't know and 16% said "it didn't

matter!" Moreover, 59% believed that money market funds would earn more than stable value over 10 years and 49% felt that money market funds would outperform bond funds, both of which conclusions may make some sense if you are one of the participants who thinks that money market funds include stocks.

The next set of questions were quite revealing relative to participant tolerance of stock market risk. Of all stock investors, 32% indicated that they would make a change in their investment strategy if the stock market declined even as little as 10%. Of these, nearly 69% indicated that they would transfer assets out of equities and 53% indicated that they would allocate less in the future. Only about 16% would transfer money in or allocate more in the future. If the stock market declined 30%, 75% of all stock investors indicated that they would make a change in their investment strategy . Nearly 67% of this group indicated that they would transfer assets out of equities and 55% indicated that they would allocate less in the future. Only 13% would transfer money in and only 17% would allocate more in the future. If the stock market declined more than 30%, 84% of all stock investors indicated that they would make a change in their investment strategy . Of these, 65% indicated that they would transfer assets out of equities and 55% indicated that they would allocate less in the future. And, 14% say they would transfer money in and about 17% would allocate more in the future. So it appears that the bulk of defined contribution participants investing in equities subscribe to the methodology of "buying high and selling low."