Communications failure

Funds have been teaching the benefits of diversification for decades. Somehow the message still hasn’t gotten through to many 401(k) participants.

Anyone who didn’t understand the perils of putting too much money in one place got a graphic lesson when Enron Corp.'s 401(k) blew apart in 2001. At the start of that year, 60 percent of the plan’s assets were held in the Houston energy company’s stock. Yet two recent surveys suggest that workers still aren’t diversifying their retirement savings nearly as much as financial experts have long recommended.

Twenty-five percent of Fidelity Investments’ 8 million defined-contribution participants keep all their 401(k) assets in just one fund, according to a recent survey by the Boston-based mutual fund giant. Similarly, when Hewitt Associates, the Lincolnshire, Illinois-based human resources consultant, analyzed the savings behavior of 1.5 million participants in 89 large plans at the end of 2002, it found that 18.1 percent were channeling all of their retirement money to a single fund. These trends, moreover, have held steady for the past three years at both firms.

If the chosen funds were themselves diversified pools, such as lifestyle or balanced funds, that were meant to serve as a participant’s sole holding, the concentration might not be so alarming. But only 16 percent of Fidelity’s one-fund investors and 12.3 percent of Hewitt’s use such blended funds. The most popular options: stable value funds, the employer’s company stock fund (as at Enron), short-term instruments and large-cap U.S. equity funds.

The findings from Fidelity and Hewitt don’t surprise Wei Jiang, an assistant professor of finance at Columbia Business School. “Most people are not very familiar with financial markets. They just do something they think is simple and direct,” she says. “But if the single fund performs horribly, then your retirement savings will suffer. You want to have a reasonable combination of fixed income and stocks.”

Experts cite a variety of reasons for the single-focus investing. Sometimes it reflects the structure of the plan. If the matching contribution is made in company stock, says Lori Lucas, Hewitt’s director of participant research, employees have a tendency to put their own allocation in the same place -- even after Enron.

The popularity of stable value, meanwhile, reflects the fact that it is often the default choice of companies with automatic enrollment. The automatic payroll deduction is invested in stable value unless the participant selects another option, which most employers allow within a specified period or at least once a year thereafter. Once the money is placed, studies show, participants rarely move it.

Consultants also suggest that the recent bear market explains some of the concentration in stable value. “People are particularly uncomfortable, especially in the past three years, with losing money. These people -- I call them the one-funders -- tend to take what they think is the safer approach, to avoid risk,” says Robert Liberto, a vice president at Segal Advisors, a New York consulting firm.

Stephen Deschenes, executive vice president of marketing for Fidelity Institutional Retirement Services Co., points out that some of these investors may actually be more diversified than their single fund suggests. Participants may have other retirement assets in more varied vehicles -- in an old employer’s 401(k), an individual retirement account or other savings. “They may be making a mental allocation, ‘Put all my fixed income in this 401(k) and all my equities in this other one,’” Deschenes says.

To reach one-funders, plan sponsors and money managers are revamping their education campaigns and investment menus. Fidelity hopes a new, personalized online planner and a greater assortment of lifestyle funds will spur additional diversification. Some plan sponsors are using shorter or more targeted brochures. Will the new programs be any more successful than the previous efforts? “There are always going to be holdouts,” Deschenes admits.

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