Commentary: 401K Do It Yourselfers Could Use Some Help

Now that they've unloaded the burden of pension investment onto the workforce, employers are discovering most employees don't want to be portfolio managers. Indeed, the two key 401(k) trends of the '90s--more funds and more seminars to explain them--may be leaving workers more dazed than empowered. That has employers wondering what to do if workers blame the boss after poor 401(k) choices leave them short of a comfortable retirement.

This fear of recrimination has employers scrambling. Now, instead of just offering financial education, they're hiring people to provide actual advice. Telling employees to put 40% of a 401(k) into Vanguard Index 500 is a big improvement on educating folks on the trade-off between risk and return. But this still leaves workers on their own to carry out the advice--and to adjust for shifting markets, which can distort even the most carefully built portfolio (table).

SAFE HAVEN. There's another alternative, and it ought to be a core option in every 401(k) plan. It goes by several names: lifestyle fund, multifund, or fund of funds. But it represents a partial return to the days when companies provided professional pension management. For the millions of workers too scared, lazy, or busy to run their own investments, a multifund can offer a safe haven. Choose such a fund--keyed to your age or risk tolerance--and you'll know a pro is maintaining a balanced portfolio of U.S. and global stocks, corporate and government bonds, and cash.

How might you benefit from a multifund? Looking at the 1997 returns earned by 296 participants in four employers' 401(k) plans, Robert Markman, president of Markman Capital in Minneapolis, found 55% could have done better with the average conservative multifund, which earned 13.4%. Aggressive multifunds, at 18.4%, outperformed 78% of the do-it-yourself accounts. Some of the worst performers? Software engineers and doctors who actively managed their accounts, timing the market and chasing hot funds. Both winners and losers were less diversified, and thus exposed to more risk, than they would have been in multifunds.

Markman is hardly a neutral observer: He manages Markman MultiFunds, which builds portfolios using stock, bond, and money-market funds from several families. But other research seems to back his contention that a 401(k) education program doesn't turn you into Warren Buffett. For example, workers invest a third of 401(k) assets in their own companies' shares, meaning they're betting their jobs and retirement on the fate of a single stock.

Ignorance hasn't hurt in the booming stock market. The median 401(k) portfolio earned 117% from '89 to '96, meaning the collective wisdom of 401(k) amateurs nearly matched that of pension managers, who earned 119%. But that median portfolio is now top-heavy with stocks. "The inevitable market correction will be the Waterloo of the whole 401(k) industry," says Peter Starr of consultants Cerulli Associates.

The emerging 401(k) advice industry argues that multifunds are a dead end because they tend to be limited to options for conservative, moderate, and aggressive investors. "Would you shop at a shoe store that only offers size 3, 7, and 11?" asks Scott Lummer, chief investment officer for 401k Forum, a Net-based investment counselor in San Francisco.

But even custom-tailored advice may not be the answer. Surveys by Boston researchers Dalbar Inc. find many workers are challenged just to decode their 401(k) statements. The well-run 401(k) will have to recognize these limitations. Already, some plans such as Fuji Film's feature "tiering"--brokerage accounts to satisfy the stock-pickers, eight or nine sector funds for the mix-and-match majority, and funds of funds for the third of employees who don't want to be bothered.

The rise of 401(k)s requires workers to pony up not only the money they'll need for retirement but the time and effort to fathom Wall Street's mysteries. For vast numbers, that's one burden too many. Give them the simple multifund solution.

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