ANYONE with a 401(k) retirement plan can't help but worry about it. Most plans put your future into your hands. You have to choose your own investments from a list the plan provides.
But how do you choose? Some employers distribute booklets explaining general investment principles. They often include pie charts, suggesting how "growth" or "income" investors might split their money between stocks and bonds.
In the end, however, you throw darts. You know little or nothing about the level of risk your investments represent. Some of you will retire with half the income that you could have had, if you'd made better choices in your 401(k).
Don't get me wrong; I'm all for investment education. But it's not going to turn the average employee into a fund-picking superstar.
To get the most from your money, you need specific, personal advice. Ideally, it will be based on the same scientific systems of analysis used by the managers of major pension funds.
In the past, you could only dream of getting that level of professional help. But the 401(k) world is on the verge of change.
A few top firms are developing personal advisory services, which employers can make available to employees.
At first, this help will be offered only by major companies, but eventually it will filter down to smaller ones (at present, it's not available for individual purchase).
The advice will come from a smart computer that's programmed with information about the investments available in your 401(k).
You'll add personal information (income, age and expected retirement year); data on any savings held outside your plan (for example, your spouse's retirement plan); and the amount of income you think you'll need when you retire.
The program then tells you which of your plan's investments will give you the best return, consistent with your retirement goal and the risk you can afford. You're also told how much money to invest in each.
A standout product
The best-in-show for this new 401(k) advisory business -- in fact, the finest tool I've ever seen prepared for individual use -- comes from Financial Engines Inc. in Palo Alto, Calif. The firm was founded by Stanford University finance professor and Nobel laureate William Sharpe, whose groundbreaking studies of how markets work transformed the professional money-management business.
Sharpe's product is still in its pilot phase but should be available to employers by midyear.
One big thing makes it special. It shows you the odds that the mix of investments you have chosen will actually reach your retirement goal.
This probability projection -- used routinely by professional investors -- is something most individuals won't have seen before. Here's an example to help you understand what a breakthrough it is:
The $100,000 goal
Imagine that you have $50,000 in mutual funds that you think will gain 8 percent a year. If you're aiming for a $100,000 nest egg, a calculator will tell you that you can retire in 10 years with money to spare. Most investment software will agree. "Congratulations," the computer screen might read, "you will achieve your goal."
But will you really? Future returns aren't guaranteed. Furthermore, an average annual return of 8 percent can yield a wide range of dollar amounts over 10 years, depending on how the market performs in each of those years.
That's where Financial Engines comes in. Its powerful computing software tells you what your chances are. You might learn, for example, that your aggressive stock funds have only a 30 percent chance of meeting your $100,000 goal. If they miss, you might wind up with only $75,000, 10 years from now.
That information may come as a shock. You thought that as long as you held for the long term you'd always win. In fact, that's not so. Your gain could be a lot lower than you thought.
If that's a risk you don't want to take, Financial Engines' software lets you test other possibilities. You might seek a plan that has a 90 percent chance of paying you $100,000, 10 years from now. That means choosing a lower-risk mix of funds and investing more money in them each month. But you would be much surer of your retirement goal.
The other computer advisory services give you no clue that your plan might not work. But they all know how important this analysis is.
Fidelity Investments in Boston, which will roll out a 401(k) PortfolioPlanner this spring, hopes to build probability into the system soon.
It takes dramatically more savings to be 90 percent sure of meeting a certain retirement goal. That's something every investor needs to learn.
Pub Date: 3/23/98