Like church and state, 401(k) retirement accounts and investment advice have long been considered separate entities.
Companies were scared stiff of being sued by their employees if recommendations went awry, so they served up only the broadest of financial platitudes. But the wall is tumbling down in 2003.
Four out of 10 companies with 401(k) plans now offer some kind of advice to their workers on how to invest their money, according to a survey by the Profit Sharing/401(k) Council of America. This affects a lot of people and money, since 42 million employees have $1.6 billion invested in 401(k) accounts. The average annual contribution is $3,600, down a bit since the stock market tanked.
“When all you had to do was put in your money and see it go up 15 to 20 percent a year in the 1990s, you didn’t see the need for professional advice,” noted David Wray, president of the Chicago-based Profit Sharing/401(k) Council of America. “The last three difficult years have changed the general belief that investment is easy and additional knowledge unnecessary.”
The new 401(k) advice giving is growing daily, with companies favoring one or a combination of methods:
– If you work for a large firm, when you log onto its employee Web site, you’ll probably be able to click in some of your own investment questions. The answers you receive take into account your personal goals and retirement horizon.
– If you work for a small firm that has most of its employees in one location, a financial planner will likely come around to work to give one-on-one counseling.
– There are also telephone hotlines offering investment advice.
This independent advice deals with mutual fund options available in your 401(k) plan. It comes from a firm hired by the employer, not from the employer or fund company.
What’s made the trickle of advice about 401(k)’s from companies grow to a cascade?
A Labor Department advisory opinion gave SunAmerica, a subsidiary of AIG, an exemption from conflict-of-interest regulations that had prohibited 401(k) providers from directly advising their investors. The ruling required that the 401(k) providers hire independent firms–in AIG’s case, Ibbotson Associates–to do the calculations for portfolio recommendations. For a fee, the individual portfolios of that firm’s employees are rebalanced quarterly.
As a result, many other financial services companies are entering this burgeoning field of third-party advisers.
“As 401(k) balances got larger and larger, people began to feel uncomfortable about making decisions on their own,” explained Michael Scarborough, president of The Scarborough Group benefits consulting firm in Annapolis, Md. If your own 401(k) plan is undergoing this metamorphosis, keep a watchful eye and offer your employer feedback on the effectiveness of the new information. Don’t use it as an excuse to forget about your account. Follow your 401(k) carefully as a long-term investment, avoiding decisions based on conversations around the office water cooler.
“If you talk about your 401(k) returns with co-workers, remember that they probably know no more about it than you do, and that their risk tolerance and goals may be different from yours,” cautioned Thomas Belisari, a certified financial planner with Key Financial Inc. in Westchester, Pa. “Also, don’t chase the returns of various funds, since today’s winner is tomorrow’s loser most of the time.”
One of the biggest mistakes workers make is putting too much of their 401(k) money into their company’s own stock (need I mention Enron here?), a point on which all the experts agree. Another miscue is being shortsighted and restless.
“Trying to predict the stock market can be a dangerous way to design your 401(k),” warned Emily Hall, senior analyst with the Morningstar Inc. research firm in Chicago. “For example, investors whose stocks have been hammered the past couple of years may want to get out of them entirely and increase their bond holdings because bonds have performed so well.”
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Those closer to retirement may indeed want more bonds and they also offer diversification, Hall acknowledged. But for the younger investor, interest rates will rise again at some point and damage any portfolio weighted too heavily in bonds.
Meanwhile, there’s a change in 401(k) contribution levels this year: If you’re under age 50, the maximum amount you can contribute to a 401(k) or similar plan has risen to $12,000 from $11,000. If you’re 50 or older, you generally may contribute up to $2,000 more this year, for a total of $14,000.