Are Your Employees Checking Their Retirement Plan Allocations?
Housing Bubble, credit crisis, recession, inflation, stagflation – these are terms that we hear quite often these days, and the mere mention of any of these can cause investors to cringe and markets to drop. The current economic climate and market volatility is causing many 401(k) plan participants to lose confidence in the market and in the performance of their retirement plan. All the more reason to ensure your employees are taking stock of their 401(k) allocations, if they have not already done so, and make adjustments if necessary.
A diversified allocation based on the participant’s risk tolerance along with periodic rebalancing and tweaking, can go a long way to improving long-term returns and controlling volatility. Unfortunately this is not how many participants manage their 401(k) plans.
Many participants have been told to “stay the course” or “buy and hold”. While this may be sound advice, there is a difference between “staying the course” and forgetting your 401(k) altogether. A recent study by Hewitt Associates found that from 2000-2004, only 40% of 401(k) participants touched their accounts even once, leaving 60% of participants not touching their account at all. Much of the reason for this could be that many participants are not confident enough to make decisions on their allocation. Big Research conducted a survey for Nationwide Financial and found that only 28% of respondents were confident making 401(k) investment choices with access to financial advice, while 23% were confident having an advisor make investment decisions for them as well as do the investing on their behalf.
Participants who are confident in making decisions for themselves and are making adjustments to their accounts may still be missing opportunity. Most plans are somewhat limited in their investment options and do not offer great diversifiers like commodities, long/short funds, and global real estate. Research has shown that holding these asset classes in a portfolio can reduce volatility and increase return. This is because one of the basic guidelines to portfolio diversification is to hold assets that have little or no correlation to traditional asset classes such as large cap stocks. By viewing outside assets along with your 401(k) account, you may be able to incorporate some of these asset classes into your overall portfolio. What is not available in your 401(k) can be held in an outside account.
This is an ideal time to be talking with participants and educating them about proper allocation both inside their 401(k) accounts and out. Having a resource for this education is very important, and that is why more companies are being proactive in providing their employees with access to not just investment information and education, but also to investment advice. In times like these, it might be the best thing you can do for your employees.
To learn more about this subject, please click on the following links:
HR Management article on how employers are offering investment advice to employees
Ibbotson Study Underscores Importance of Real Estate in Global Investment Portfolios
Stay Course on 401(k), but Tweak It
Participants Report Desire for Professional Money Management Services
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March 14, 2008
Hill, Chesson & Woody strives to keep our clients' group decision makers abreast of trends influencing the employee benefits market. Look for Eyes on Benefits to bring you news and information affecting you and your employees.
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