401(k)s - Losing money for first time

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Monday July 09 08:31 AM EDT

401(k) Accounts Are Losing Money for the First Time

By DANNY HAKIM The New York Times

For the first time in the 20-year history of the popular 401(k) retirement savings plan, the average account lost money last year, even after thousands of dollars of new contributions.

For the first time in the 20-year history of the popular 401(k) retirement savings plan, the average account lost money last year, even after thousands of dollars of new contributions. And despite some strengthening of stock prices in the last couple of months, recent estimates show, the declines persisted in the first half of this year.

The trend is exposing years of mistakes by employees, raising some questions about proposals to permit Americans to manage part of their Social Security accounts and clouding the future of many employees' nest eggs for retirement.

The losses have led many individual workers to second-guess themselves, since they are the ones who decide how much to contribute to 401(k) plans and how to invest their money. There are some risks that people cannot control, such as stock market declines and company contributions that shrink with profits.

But a look at shifting account balances over the last decade shows that many people have grown overly dependent on stocks, do not contribute enough to retire when they expect to and put too much into a single aggressive mutual fund or their own company's stock, financial planners and plan administrators say. And relatively few employers offer much useful help to workers in making these crucial decisions.

Still, many people seem eager to give Americans more control of their retirement funds. A special commission appointed by President Bush is exploring ways to carry out his campaign promise to permit Americans to manage a portion of their Social Security benefits. Many states are also creating plans similar to the 401(k), so that their employees can manage their money themselves.

For many workers, the 401(k) has long seemed to be a magical, ever- expanding account. The plans grew quite popular, partly because they coincided with the strongest and longest bull market in history. They also provided benefits to workers at many smaller companies that did not have traditional pension plans, encouraged saving and created a portable plan better suited for the modern, job-hopping work force.

But this last year has brought a gloomy crop of 401(k) statements, and that has employees wondering whether they made the right decisions in the first place. The average account shrank to $41,919 in 2000 from $46,740 in 1999, according to a report from Cerulli Associates, a benefits consulting firm. Although comprehensive 401(k) account data will not be available for some time, the average account has since shrunk about $600 more, to about $41,300, according to a rough projection by one Cerulli analyst.

"You could be stupid in the last 10 years and make a lot of money," said Mark Bruggemeyer, a 45-year-old co-pilot for Continental Airlines. "Now you've got to buckle down and start learning all over again."

Mr. Bruggemeyer has more than 80 mutual funds to choose from in his 401(k) plan. This never seemed to be a problem before, because the two funds he had picked, almost randomly, kept going up. In the last year, though, the value of Mr. Bruggemeyer's technology fund has been cut in half, and his holdings in a diversified stock fund have fallen more than 12 percent.

Like many Americans, Mr. Bruggemeyer grew overly dependent on stocks. The average 401(k) account had 72 percent in stocks and stock funds in 1999, according to the latest data available from the Employee Benefit Research Institute, a Washington nonprofit group.

That stance reverses the conservative posture of investors a decade ago and appears somewhat aggressive when compared with the classic allocation of professional pension plan managers: 60 percent in stocks and 40 percent in bonds.

More recent information from Fidelity Investments, which handles a mix of small and large employers' plans as the nation's largest 401(k) administrator, shows an even more aggressive posture. The average Fidelity account had 19 percent in company stock on top of almost 62 percent in stock funds at the end of last year. Owning a large amount of a single stock is riskier than owning an aggressive stock fund since so much rides on the fortunes of one company.

This is not to say any particular worker should abandon stocks or pile into bonds, or that the typical pension fund mix should be copied by workers of various ages and incomes.

Moreover, most pension funds have faced losses as the market has declined. But professional pension trustees work zealously to balance risk and reward in traditional pension plans, and workers also need to have a strategy and stick to it, financial planners say.

"It's wonderful that individual employees are empowered," said Brian Orol, a financial planner in Raleigh, N.C. But he thinks workers do not realize that many companies are using the 401(k) to replace the traditional pension, and that the guaranteed retirement income provided to many who retired from the end of World War II through the early 1990's is disappearing.

Beyond averages, there are signs of many flawed individual choices. Between one-fifth and one-quarter of workers eligible for 401(k) plans do not participate at all, according to the Profit Sharing/401(k) Council.

And while financial planners warn that those close to retirement should take fewer risks with their money, they note that some young people with the longest time frames and the most ability to withstand market shocks invest too conservatively.

At the same time, many baby boomers are behind in their savings, a deficiency the Bush administration tried to help address by significantly raising, in the tax bill recently approved by Congress, the maximum contributions and permitting those over 50 to contribute even more to catch up while they can.

At another extreme in risk, workers at big companies are overly reliant on company stock. The average account at Hewitt Associates, the nation's second-largest 401(k) provider, which caters to Fortune 500 companies, has almost 30 percent in company stock. If a company fails, employees might lose much of their retirement money along with their livelihood as their jobs vanish.

"I don't know where this is going to lead us over the next 10 or 15 years, when these people start retiring," said Roy T. Diliberto, a Philadelphia financial planner and the chairman of the Financial Planners Association. "Some checks are not going to be there."

Some companies reduced matching contributions last year as profits declined. About one-third of the companies that offer 401(k) plans link their contributions to their profits. Most add a variable bonus to a fixed contribution, while others contribute no money if there are no profits. Some employees may see their matching contributions reduced this year or next.

While workers appear to be putting more into their 401(k) plans during this period of stock market weakness, overall contribution rates will still leave many workers far short of their retirement goals. At accounts run by the Vanguard Group, the nation's fourth-largest 401(k) administrator, contribution rates rose from 7 percent of pay for the average worker in 1999 to 8.2 percent in May. But Vanguard estimates that a couple with an income of $50,000 that expects to retire in 30 years needs to contribute 15 percent to maintain its standard of living without a regular pension.

"Most people now are contributing at 8 percent, and with the company match added it might be 11 percent," said William McNabb, who oversees retirement services for Vanguard. "That gives you a 4 percent shortfall."

"Whether people have enough money or not when they retire is going to be the critical issue in determining whether this experiment worked," he said.

The 401(k) experiment is well along now. Some companies, like Continental, offer both 401(k) and traditional "defined-benefit" pensions. The older-style plan provides guaranteed retirement income and tends to be best for people who spend most of their careers at one company. Assets in 401(k) and similar plans, however, have surpassed those in traditional pension plans.

Where early 401(k) plans might have had a handful of mutual funds, some large companies now offer more than 100 funds and even brokerage accounts that permit employees to trade stocks.

"People are not doing a good job picking portfolios," said Shlomo Benartzi, a professor at U.C.L.A. and a co-author of a study on such plans. "If you give people too many choices, you can get them confused."

Vanguard, like Fidelity, Hewitt Associates and other big administrators, offers brokerage accounts in some plans. Mr. McNabb says the feature was requested mostly during the bull market.

"The participation rates in these options are very small, and I think that's a good thing," he said.

Employers have certain legal obligations, such as monitoring their plans' investment options and providing educational materials. But only in the last few years has a crop of independent companies arisen to address one of the most critical problems: helping employees figure out how to invest. Employers are beginning to turn to companies like Financial Engines of Palo Alto, Calif., and Morningstar of Chicago to create automated tools that give advice to workers; Fidelity has created a similar service. But the advice given by different services can vary considerably, and their overall utility remains to be seen.

Continental Airlines recently started using software created by mPower of San Francisco to help its employees diversify better and to improve their chances of having enough money to retire on.

Mr. Bruggemeyer said that when he used the software, "I got a big red light that says, `You're not even close.' "

Although Mr. Bruggemeyer likes having the power to choose where to put his money, he realizes he did not give much thought to what he picked in the past. Like many investors who tilted heavily toward stocks, he has discovered bonds, which had looked cowardly but now look sane.

"Before," he added, "it was, do I go into this fund and make 100 percent or go into that one and make 98 percent?"

-- Anonymous, July 09, 2001


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