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Mutual Funds Playing a Bigger Role in 401(k) Plans


Now that tax-filing and IRA season are over, it's time to turn your attention back to the tax-sheltered accounts that matter most: 401(k) plans.

Millions of people have found 401(k) and similar workplace programs to be more valuable than IRAs, for two key reasons.

First, you can sock away more tax-sheltered money annually in a 401(k) than you can in an IRA. Second, there's a good chance your employer kicks in matching funds on your behalf.

Even as more Americans trade stocks individually, mutual funds are by far the most common way 401(k) participants invest in growth stocks, small companies, foreign stocks, bonds and money market instruments, according to the latest version of an annual study from Buck Consultants, a pension-consulting firm based in New York.

The survey, which polled nearly 650 companies with 401(k) plans, found that mutual funds accounted for at least 80% of the money invested in each of those asset categories.

"Mutual funds are becoming more important" in 401(k) plans said Gary Petersen, managing principal of Buck Consultants' Phoenix office.

That partly reflects a preference by employers for one-stop shopping in the administration of 401(k) plans, he said. Companies like the convenience of receiving everything they need--investments, record-keeping and trustee services--under one roof.

Also, people have become more familiar with funds and are demanding them.

"More participants than ever seem to recognize the major mutual fund players such as Fidelity and Vanguard," Petersen said.

Notably, the survey found a sizable jump in the number of employers offering index funds as an option. Nearly 61% of companies with 401(k) plans offered index funds, according to the study, up from about 52% in a similar survey taken a year earlier.

Index funds, most of which track the Standard & Poor's 500 index, have fared particularly well for several years, outperforming most actively managed funds. That explains some of the growth of index funds within 401(k) plans, but employer responsibility also weighs in as a factor.

"The least risky thing a 401(k) plan sponsor can do is offer an index fund," argues Gus Sauter, a managing director at Vanguard who oversees 25 index portfolios.

His reasoning: Since index funds move in virtual lock-step with their target benchmark, there's no risk of drastic under-performance, as frequently happens with actively managed funds.

"Sponsors that offer index funds are telling investors they'll earn a market rate of return, and the funds will deliver that," he said.

Although the figures from Buck Consultants didn't show how investors split their 401(k) investments, that information was supplied by another study released earlier this year.

The joint survey from the Investment Company Institute and the Employee Benefit Research Institute, both headquartered in Washington, shows that stock funds and company stock account for the lion's share of 401(k) assets.

(The ICI-EBRI survey is a comprehensive database project that has collected information on 6.6 million 401(k) investors holding $246 billion in nearly 27,800 plans.)

Although 401(k) investing should not be treated lightly, the following tips can help guide your thinking in this area:

* View 401(k) investing as a long-term endeavor. This implies you should steer toward stock funds, which are risky compared with bond and money market investments but also offer potentially higher returns in the long-run.

* Don't make frequent changes. "What you're buying is a fund manager and his or her ability to invest," said Alan Rosenfield of Expansion Funds America, an investment and retirement consulting firm in Phoenix. "You don't want to be double guessing your managers all the time."

* Try to gauge the riskiness of your 401(k) choices. An easy way to do this is by checking a fund's performance during rough market stretches in 1987, 1990, 1994 and during last summer and fall's swift but steep market decline.

* Consider index funds, if available, for at least part of your 401(k) holdings. Besides being relatively predictable, they provide a benchmark against which to evaluate other mutual funds. "Actively managed funds cost you more to invest in than index funds, so you should see if the manager is earning his or her keep," writes Hal Ratner of the 401(k) Forum in San Francisco. The firm offers a Web site devoted to 401k issues, at

* Don't concentrate too heavily in a single investment, namely your employer's common stock. You already depend on the company for your livelihood, so there's no sense risking all or most of your retirement on the firm's future. With the general trend of employers offering more investment choices, this is less of a problem than in the past. About two-thirds of 401(k) plans offer between five and 10 investment options, according to the Buck survey.


Russ Wiles is a regular contributor to The Times and a writer and columnist at the Arizona Republic. He can be reached at


At the Conference

The Times' Investment Strategies Conference, to be held May 22-23 at the Los Angeles Convention Center, features a panel on "Maximizing 401(k) and IRA Plans," moderated by Times mutual funds columnist Paul J. Lim. For registration information, call (800) 350-3211 or visit

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