by: Roxanne Fleszar
from:  401kWire
February 29, 2000

Just $1.00 and a good notion as to the number of jellybeans in a large jar and you could be this year’s winner of the church bazaar’s grand prize! With nothing more than a charitable dollar to lose, this is a good time for making a random guess. The same does not hold true for retirement assets. Yet a survey by Marshall & Ilsley Trust & Investment Management asserted that this is exactly what 401(k) participants are most likely to do when making asset allocation decisions for their retirement portfolio. And the 1999 John Hancock Retirement Survey backs them up.

Slightly less than half of the respondents to the latter survey reported having an allocation plan for their retirement assets, and only 54% of those had implemented the plan. This leaves much room for concern over the appropriateness of self-allocations. Consider also that less than 25% of the respondents perceive themselves as knowledgeable investors and the big picture starts to look worse. Most alarming, respondents to the John Hancock survey illustrated declining familiarity with all investment options except domestic stocks. For example, while 13% of respondents understood that money market funds are comprised only of short-term securities, 41% believe they include stocks and 49% believe they include bonds.

Having worked with plan participants for the past 20 years, this is no surprise to me. Unfortunately, I can attest that financial education efforts have not created a nation of financial literati. Rather, the unparalleled popularity of the 401(k) plan has forced millions of unknowledgeable participants to navigate their own path to a secure retirement; and that makes for a lot of misdirected drivers in the driver’s seat.

There are employees at every company I visit seeking solid advice; some chase the best performing funds for the last quarter, other follow the selections of a co-worker. Just look at a sampling of participant allocations to discern if the majority makes sense to you.

What is a good alternative for participants? Steer them in the right direction by implementing and promoting an understanding of managed fund selections also known as a fund-of-funds, an asset allocation fund, a multi-fund, or a lifecycle fund. Surprisingly, fund companies indicate very low utilization of multi-fund options by participants; fund companies don’t believe participants understand them well enough to select them.

Use of a risk tolerance/investment horizon questionnaire will act as a road map to help them reach their destination – a stable and preferably comfortable retirement. It will direct them to a conservative, moderate, or aggressive fund. Thereafter the fund provides them the professional management and diversification among asset classes they need and yearn for. Plus, use of managed funds removes the opportunity for participants to make investment selections for the wrong reasons, such as name-brand awareness or poor advice from a friend or relative.

All of this is a huge advantage for the majority of unsophisticated 401(k) investors. Some have reduced their retirement savings by investing too conservatively in a stable value or bond fund option, while others lost significant growth potential by investing and losing with a disproportionate allocation to higher risk options such as the international or small-cap options.

And the rewards do not end here. As plan sponsors, you may unburden yourself and your investment committee of screening for securities overlap and style diversification, as these tasks become the responsibility of the managed fund manager(s). So when your plan is due for its next scheduled maintenance check-up, add managed fund options to give you and your employees a smoother ride down the road to retirement.