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401(k) Money Ambles To Fixed Options

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Participants in 401(k) plans are moving money to fixed income options, but at a pace that is more of an amble than a stampede, according to interviews conducted by National Underwriter.

Participants in Principal Financial Groups 401(k) plans have incrementally moved money from equity to fixed options in these plans, says Monica Kirgan, vice president, participant communications with the Des Moines, Iowa-based company.

At year-end 1999, assets in Principal 401(k) plans were 60% invested in equities and 40% in fixed account options, which include money market, bond and balanced funds as well as guaranteed investment account-type options, she says. That mix changed to a 50%-50% split at year-end 2000, a 46%-54% equity-fixed split at year-end 2001, and a 40% equity, 60% fixed split at year-end 2002, Kirgan continues.

Money moving into money market options grew to the current 8% from 4% in 2000, and bond option totals increased to the current 12% from 5% in 2000, she adds.

Calls to Principals call center increased between October 2002 and February 2003, but there was not a proportional movement in 401(k) money, Kirgan says.

Callers wanted to make sure a long-term investing strategy was appropriate, she adds.

Actually, Kirgan says, there has been a slight increase in deferring amounts from paychecks into 401(k) accounts. And, in 2002, 53% of assets in 401(k)s that could have been paid out because of retirement or job changes, were retained in accounts, she adds.

A “Well Being Index” sponsored by Principal found that consumers are showing concern over their continued financial well-being.

The general consumer survey found that in first quarter 2003, 35% of consumers moved retirement savings to more stable investments, up slightly from 34% in fourth quarter 2002 and more significantly than the 20% who did so in third quarter 2002.

The Well Being Index for first quarter 2003 also measured the average consumers financial response to the possibility of war with Iraq. Some 49% said war would not impact financial strategy, while 15% said they would move to more conservative investment options.

At Vanguard Group, Valley Forge, Pa., a recently released study found there was a modest movement out of equity investments into fixed investments in 401(k) plans, says John Woerth, a Vanguard spokesman.

At year-end 2002, participants were allocated 64% to equities and 36% to fixed income accounts compared with 1999 year-end totals of 73% to stocks and 27% to bonds, Vanguards “Participant Report Card for 2002: The Income of the Bear Market on Retirement Savings Plans” indicates.

But, 40% of this shift, or 4% overall, occurred because money was moved while 60%, or a 6% total, occurred because of portfolio reallocation due to falling market values.

Even with a falling stock market, the survey found that seven out of 10 new dollars went into stock allocations in 2002 compared with eight out of 10 new dollars in 2000.

Still, the Vanguard survey reported 85% of participants made no investment exchanges among investment options in their retirement plans. Those likely to trade were slightly older, had more time on the job and larger account balances, it found.

In a falling market, high-balance participants are likely to be more aware of the bear market and its impact on retirement savings than those participants with lower balances.

“Those in the higher income brackets have felt the market sting more severely,” says Brian Orol, a certified financial planner with Strategic Financial Planning Group in Raleigh, N.C.

There has been movement within accounts that started in the second half of last year, he adds.

Clients are moving existing money into fixed accounts but new money continues to be invested in equity accounts, he says.

When younger clients move out of equity options in 401(k) plans, it is often because they are too weighted in equities to begin with, Orol continues.

Late last month, the Investment Company Institute and the Employee Benefit Research Institute, both in Washington, released findings gathered from a database of 14.6 million active 401(k) plan participants in 48,786 plans with $632.7 billion in assets.

The study found, among other things, that the average asset allocation of 401(k) plan participants held steady and was essentially unchanged from year-end 2000, despite equity market volatility in 2001.

A total of 48% of plan balances are invested in equity funds, 17% in company stock and 8% in balanced funds at year-end 2001, the study indicates.

At Hartford Life Insurance Company, Simsbury, Conn., there hasnt been an upswing into fixed options in the last six months, according to Jim Davey, managing director of corporate retirement plans.

Rather, investments have been consistent with previous investments of between 22%-25% in fixed account and money market options that are a piece of $3 billion of total 401(k) contributions, he continues.

One reason that Davey cites for this is time spent on educating participants on the value of diversification even in “a prolonged economic downturn.”

That education is more effective when there is a local presence such as an enrollment staff, third-party administrator or financial advisor to help participants.

Reproduced from National Underwriter Edition, March 31, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.