401(k) investors needn't go into hiding Some do switch positions, to others' inconvenience

Mutual funds

September 06, 1998|By Bill Barnhart | Bill Barnhart,CHICAGO TRIBUNE

Evidence gathered over recent stock market corrections proves that big-ticket players, not individual investors, were the major sellers as stock prices headed south.

Professional traders who sold stock before and during the Crash of 1929 were ridiculed and investigated by congressional committees. Jesse Livermore, one of the more notorious bears of that era, was even forced into hiding. As recently as the 1987 crash, program traders and big-buck players in stock-index futures were blamed.

Today, few commentators castigate Wall Street pros for selling heavily during market turbulence. Meanwhile, influential voices on Wall Street and in the financial press preach that the small investor is supposed to stay put when stock prices are falling.

Although investors who stood their ground or bought on price dips profited from previous corrections, resilience is not the best strategy for everyone all the time.

There is nothing intrinsically good or bad about buying or selling, and no investor should feel pressured by propaganda to the contrary.

What you do with your 401(k) account is of great interest on Wall Street as well as among employers who sponsor retirement plans.

In August, Lincolnshire, Ill.-based management consulting firm Hewitt Associates introduced a 401(k) index, which tracks daily 401(k) account transfer activity among 1.4 million workers at 40 major employers who permit daily account transfers within several investment options, mostly mutual funds. The index reflects $62 billion in 401(k) assets. Findings will be posted on a World Wide Web site, www.hewitt.com/401kindex

"Our clients have asked us for years, 'Do they have people who are trading in patterns other than what you typically see?' and we could only speak anecdotally," said Stacy Schaus, a Hewitt consultant who helped develop the index. "Now, we can give them a true benchmark."

The Hewitt index will provide valuable insights into the increasingly potent 401(k) market.

For example, the Oct. 27 market slide, in which the Dow industrial average plunged 554 points, sparked an extraordinary amount of 401(k) account transfers, mostly out of stock funds into fixed-income funds, Hewitt found. The next day, transfer activity was even greater, as investors switched back into stocks.

The Hewitt data indicate that market-timing is popular among only a tiny segment of 401(k) participants. "There is a small group that seems to be producing all of these trades, less than 1 percent of the people that create double or triple the daily average," said Hewitt consultant Ricardo Reinking. Nonetheless, even a few market-timers can influence prices and market sentiment.

The published Hewitt data will not identify employers or employees, but employers can learn which of their employees engage in above-average transfers.

"We can look at the patterns of trading for those individuals, and they might decide to pinpoint communications to those folks [making numerous transfers] and let them know that this may not be the best strategy for their retirement," Schaus said.

But financial advice in the workplace must be based on realistic understanding of how employees, not Wall Street promoters, view 401(k) plans.

Dallas Salisbury, president of the Employee Benefit Research Institute in Washington, says employers probably don't care what individual employees are doing with their 401(k) investments. A greater concern is that an increase in total transfer activity in a work force -- more than four transfers a year per employee, for example -- could trigger additional charges on employers by third-party 401(k) plan administrators.

Many 401(k) participants are not long-term investors. It can take up to five years or more for a long-term investor to recover from a major market downturn, but the average worker stays with the same employer for just over four years. And most workers take as immediate income any lump-sum retirement plan distributions when they leave, Salisbury said.

Therefore, the notion that all 401(k) participants are long-term investors is seriously flawed. "The investment time horizon is the next time I change jobs," Salisbury said. Telling such investors to hold tight in a serious stock decline may be harmful to their financial well-being.

What's more, the prospect of employers monitoring employee 401(k) activity raises disturbing questions regarding privacy.

Pub Date: 9/06/98

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