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Nest Eggs Cushioned From Market's Drop

Retirement: Diversified investments have kept pensions from falling as far as key stock indexes.


Amid the brutal stock market plunge of the last 2 1/2 years, there is at least one bright spot: the nation's pension and retirement plans.

Although pension plans of major corporations and government agencies--along with 401(k) retirement plans of individual employees--have taken losses in the market meltdown, they in aggregate have not fallen anywhere near as much as the stock market as a whole, largely because of the plans' conservative investment approaches.

As the Standard & Poor's 500 stock index and the Dow Jones industrial average declined more than 20% in the last year, corporate and state pension plans and individual retirement plans lost only 5% to 10%--largely because they have diversified investments among bonds, stocks and real estate, according to surveys of thousands of pension funds by consulting firms and research institutes.

That means the retirement savings of millions of workers have not been as hard hit as the market plunge would indicate. That could help explain why consumer spending and the economy have held up much better than the market.

"There is no retirement crisis because of the stock market decline," said Dallas Salisbury, president of the Employee Benefit Research Institute, a Washington-based organization financed by employers, unions and government agencies that monitors thousands of pension funds.

To be sure, low overall savings rates and other problems pose a long-term threat to Americans' retirement incomes.

Nor are Salisbury and other experts minimizing the losses of employees who had 401(k) accounts and other retirement funds invested in the stocks of Enron Corp., WorldCom Inc. and Global Crossing Ltd.--all now in bankruptcy proceedings--and other troubled companies. Some of those workers have lost most or all of their retirement savings.

But for the overall work force, the market's plunge has not caused serious damage to prospects for retirement income, experts said. For most workers, problems with their ability to retire stem less from the stock market plunge than from the fact that they have not saved enough, experts said.

Lesser Effect of Markets

Stock markets simply don't have the effect on consumer attitudes that many believe they do, said Robert J. Shiller, Yale University economics professor and coauthor of a paper on so-called wealth effects.

Housing prices--which have continued to rise while the stock market has plunged--have a strong effect on consumer feelings of wealth, Shiller and his colleagues found, but stock prices do not.

So this "drop in the stock market wouldn't have much effect on consumers' spending," said Shiller, who gained public prominence in 2000 with his book "Irrational Exuberance," which said investor enthusiasm had driven stock prices to unsustainable levels.

Investment managers for pension funds and even individuals investing for their own retirement apparently were not carried away by irrational exuberance, pension experts said.

Managers for pension funds are governed by rules of prudent judgment to spread investments among fixed-income securities such as Treasury and corporate bonds, along with real estate and stocks. Typically, such funds hold 40% of their assets in non-stock investments and shift money out of stocks as rising prices make that portion of the portfolio top-heavy.

Many individuals likewise have kept investments diversified among Treasury bonds and bills and bank certificates of deposit, as well as stocks. And the 401(k) plans most companies offer to employees include relatively conservative mutual funds, not all-technology-stock funds and other high-risk varieties that have suffered severe losses.

In addition, pension funds typically invest with a long-term horizon. At the California Public Employees' Retirement System, the nation's largest public pension plan, investments are made on a 10-year perspective in accordance with strict ratios for allocating assets among bonds, stocks and real estate.

CalPERS is shifting more of its funds into stocks as part of a normal process to take profits and move money out of investments that have performed well (bonds) into those that have lagged (stocks). During the height of the stock boom, it shifted money from stocks into bonds.

These days "we are buying equities," said Mark Anson, CalPERS' chief investment officer. "We are selling our gains in fixed-income securities and buying $200 million to $300 million in equities with every 50 point drop in the S&P 500," Anson said. That index has fallen almost 400 points in the last year.

CalPERS' mammoth investment portfolio has lost only about 5% in the last year, going from $156 billion to about $149 billion at present, because gains in bonds and real estate reduced the overall losses.

Similarly, General Motors Corp.'s pension plan--the nation's largest corporate plan, with about $65 billion in assets fell 5.7% in 2001 from a year earlier and 3% more in the first half of 2002, far less than the stock market.

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