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QUARTERLY MUTUAL FUND REPORT

401(k) Investors Getting More Help and Choices

April 08, 2006|Walter Hamilton | Times Staff Writer

Investors in many 401(k) savings programs are finding a variety of new mutual funds in their plans.

That's good news for people who want to diversify their portfolios at a time when many stock market sectors are performing better than classic U.S. blue-chip shares, the mainstay fund offering in most 401(k) plans.

Last year, for example, 85% of plans surveyed by benefits consultant Hewitt Associates offered a small-company stock fund. That's up from 79% in 2003 and 60% in 1999.

Funds that own stocks of mid-size companies were in 73% of plans last year, compared with 65% in 2003 and 41% in 1999.

But the greater choice may also be confusing to people who can't -- or don't want to -- handle investing themselves, experts say.

"We're seeing employers recognize that more choice is not necessarily leading to better outcomes," said Lori Lucas, Hewitt's director of retirement research.

The 401(k) industry is responding with various services, from one-stop-shop mutual funds to customized investment advice, that essentially do the job for investors.

One of the biggest trends is the rapid expansion of "life-cycle funds," which make all-important asset-allocation decisions for employees. Employers are also bulking up their fund-advisory services, in some cases giving workers the option of having outside professionals manage their 401(k) holdings.

"After spending billions of dollars in trying to make mutual fund experts out of 401(k) participants, we see signs that the fund companies are giving up in frustration and offering to take the decision-making role," said Lou Harvey president of Dalbar Inc., a Boston-based mutual-fund consulting firm.

Here are some of the major trends in 401(k) plans:

* Life-cycle, or target-date, funds: In theory, investment diversification is a simple concept: buy a mix of stock and bond funds and rejigger the holdings periodically based on market performance.

In practice, however, studies have shown that most 401(k) investors lack exposure to key sectors. They might be light on, for example, small-company stock funds just as the group takes off, as it has in recent years.

Another problem is that many investors fail to adjust their portfolios as they get older. Workers close to retirement should shift more of their nest egg into lower-risk bond funds, personal finance experts say.

Younger people are generally advised to put more of their money into stock funds, which are more volatile but pay bigger returns over the long haul.

To provide a smart blend of funds that adjusts over time, employers are increasingly stocking 401(k)s with life-cycle funds, also known as target-date funds.

These funds are generally designed according to the year in which investors intend to retire -- 2020, 2025 and so on. Investors pick the fund that's closest to their projected retirement date. Fund managers adjust risk levels over time by easing into conservative holdings as the target date nears.

About 63% of 401(k) plans offer life-cycle funds or a close cousin known as lifestyle funds, according to Hewitt. That's up from 55% in 2003 and 30% in 1999.

Although novice investors stand to gain the most from life-cycle funds, savvy investors should seriously consider them too, experts say.

"I don't know how many people are going to build a better model than in the life-cycle funds," said Bud Green, principal at Fortress Wealth Management Inc., a Santa Monica-based 401(k) consulting firm. "Probably not many."

A couple of caveats: Watch out for fees, and check portfolio composition.

Although they're simply a grouping of other funds, some fund companies charge extra for life-cycle funds. This is slowly changing amid criticism from investor advocates. Fidelity Investments, for example, eliminated surcharges on its life-cycle funds last year.

Investors also should pay attention to the individual funds that make up a life-cycle offering, and in particular the ratio of stocks to bonds.

A fund that is weighted more heavily toward bonds than another fund, for example, could deny an investor valuable gains over time. Vanguard Group, aiming to boost fund performance, said last month that it was increasing exposure to equities in its life-cycle funds.

Life-cycle funds are intended to be an investor's only 401(k) holding. Some investors buy life-cycle funds alongside other holdings in a misguided stab at diversification that personal finance experts say defeats the purpose.

* Fund selection advice: Beyond life-cycle funds, employees at some companies can get fund-picking help from outside professionals.

Employees typically start by filling out online forms listing thumbnail personal and financial information. At some companies, they'll get back computer-generated recommendations. Elsewhere, workers get brief phone calls or in-person meetings with financial advisors.

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