'Safe' savings plans may be riskiest of all


September 19, 1994|By JANE BRYANT QUINN

NEW YORK -- To an unprecedented degree, your standard of living in retirement will depend on how well you learn to invest. Baby boomers have twice the pension coverage that workers did 40 years ago. But back then, the employees lucky enough to retire with pensions got a monthly income for life with no further effort on their part.

Today, part or all of your retirement funds are probably stashed ++ in a tax-deferred savings plan where you make the investment decisions. Access Research in Windsor, Conn., estimates that $920 billion has accumulated in employer-sponsored 401(k) plans at private companies and 403(b) plans for nonprofits and many government workers. Your employer may or may not contribute. Most of the money comes from you.

The only trouble is that your investments are usually limited. Employers know that many of their workers aren't experienced investors. So they don't put anything too risky in their plans.

But that very conservatism limits the choice available to the better investors -- making it harder for them to grow their retirement funds. And ironically, the so-called "safe" choices that many companies provide may in fact be the riskiest of all.

Here are the dangers in many tax-deferred savings plans, that employees should press their companies to fix:

* The no-growth risk:

More than 40 percent of the money that workers contribute to their 401(k)s is interred in investments that pay steady interest but don't allow their principal to grow, according to the consulting firm, Hewitt Associates in Lincolnshire, Ill. This includes fixed-income contracts, money-market funds and bond mutual funds.

Inexperienced investors think their money is safe. But safe from what?

They're overlooking the certain risk that inflation will gobble up their returns. After taxes (which they'll pay when they draw the money out), their purchasing power will hardly have grown at all. Some 80 percent of the payouts in traditional pensions come from long-term investment gains -- stock dividends plus growth in the value of your original investment. To capture those gains, your retirement plan has to make a strong commitment to stocks.

What should employers do? Make a positive effort to teach employees to diversify into more growth investments. If a majority clings to the fixed-interest option, the plan is doing something wrong.

* The company-stock risk:

The same employers who blather about keeping workers safe may encourage them to overinvest in company stock. Any contributions that the employer makes to the plan may also be in the form of stock.

Employees often think that this stock is "safe," because they know the company so well. Yet they're easily misled by a company's previous success. For example, take IBM. For years, dazzled IBM employees kept huge amounts of their net worth in their company's stock, riding it up to $174 a share in 1987. Then it fell off a cliff, tumbling to $41 over the next six years. In the past year, it climbed back to the $67 range. But that doesn't help employees who were counting on IBM stock to fund their retirements.

Nothing is riskier than committing the bulk of your money to a single stock -- especially when your job is tied to that company, too. The worst possible mix of retirement investments is company stock plus a no-growth fixed-interest plan -- yet those are the two most popular 401(k) choices today.

What should employers do? Let the employer contribution go to any investment the employee wants, not just to company stock. Disclose to employees the risk of overinvesting even in an excellent company (remember IBM). As a general rule, 5 percent of your money is plenty to commit to your own stock.

* The mediocrity risk:

The average 401(k) plan offers only five investment funds, according to the consulting firm Foster Higgins.

The top choices come from the following list: a fixed-interest contract, a low-yield money-market fund, a bond fund, a balanced stock-and-bond fund, a diversified stock fund and the company's own stock. It's rare to find an international fund or a fund that specializes in smaller stocks.

What should employers do? Add more choices to the mix, including the so-called "lifestyle" portfolios. These funds offer a mix of stock and bond investments aimed at conservative, balanced or aggressive investors.

If employees don't understand the investments, the answer is to teach them. It's wrong to hold workers responsible for their personal futures, then tie one hand behind their backs.

Jane Bryant Quinn is a syndicated columnist. Write to her at: Newsweek, 444 Madison Ave., 18th Floor, New York, N.Y. 10022.

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.