Buy High, Sell Low? Participant Advice in the 401k Market

By • on November 5, 2010 • Filed under: Articles of Interest, Plan Participants, Plan Sponsors

by Steve Dix, QKA

As the market rebounds from the lows of 2009 I find participants who were so eager to bail out of the market a year ago are now throwing money at mutual funds as if they have forgotten the pain of the last bear market.

Is it true that history repeats itself over and over? I believe we are now seeing the makings of a bond market bubble as the Federal Reserve has manipulated interest rates to almost 0% and is trying to force investors to take some sort of risk in order produce a return above inflation.

Mutual fund inflows to bond funds are at record levels as investors chase yields. But does the average 401k plan participant understand how bonds work? Do they understand that the yield that they are currently receiving from a bond mutual fund may change? Do they also understand that if interest rates start going up, the small 3% -4% in yield they are receiving could easily be wiped out by a 20% – 30% drop in asset value?

A recent study done by Charles Schwab &; Co., Inc. (Schwab) revealed that of 1,000 participants surveyed 53 percent say they find retirement benefits even more confusing than health care benefits.

The analysis of 401k plans serviced by Schwab finds that use of advice can have a significant impact on people’s behaviors in 401k plans. Specifically, use of professional advice has a positive impact on participant savings, diversification, and investing behavior. For example:

Improved savings rates – Seventy percent of participants who receive 401k advice make changes to their deferral rates, and their savings rates nearly double as a result, jumping on average from five percent to ten percent of pay.

Greater diversification – The average participant who has not received professional advice is invested in less than four (3.7) asset classes, whereas participants who receive advice have a minimum of eight asset classes.

More disciplined investing behavior – The vast majority (92%) of advice users stayed the course in their 401k portfolios from July 2008 through February 2009 and was fully invested for the significant market rebound through the remainder of 2009.

Having an unbiased advisor to work with in a 401k plan provides participants the opportunity to ask questions and develop a personal strategy. Many times participants will log on to the web and make allocation decisions based on emotion or a tip they heard from a friend or relative.

Having an advisor also can make the difference from an investor making that fatal mistake by selling based on emotions rather than strategy. Long-term investors selling at the lows of the S&P 500 at 666 are now probably wishing they had someone to look to for some advice.

Stephen Dix, QKA, is a Senior Pension Consultant with the Wellington Group of Companies who has over 18 years of experience with retirement plan administration.

Articles on this site are for guidance only. No intention, however phrased, to offer investment recommendations or tax advice is intended, should be inferred, or acted upon by the reader without due diligence. No guarantee of the accuracy of the content is given or inferred. It is our recommendation and the responsibility of readers that they make their own further independent investigations before making any investment decisions.

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