Employees staying course with diversified 401(k) plans

Despite last year’s rash of corporate scandals from companies like Enron and Worldcom, investors have not pulled away from the attraction of 401(k) investment programs.

Although companies in Boulder and Broomfield counties are tight-lipped about their investment relationship with their employees, most investment strategists have not seen a change to other types of investments.

?I would say the money is still flowing into the 401(k)s but probably not quite as rapidly as it has in the past,? said Ronald Billings, vice president of A.G. Edwards & Sons in Longmont. ?We’re not seeing a lot of people saying it’s time to dump everything in the market.?

Although the media has demonized the programs through their representation of now-defunct companies, the advantages of the 401(k) programs are just too great and indeed are generally wise investments, according to most brokerages.

?The real advantage to the 401(k) and the reason most people invested in them in the past and should continue to invest in them is that you have the tax advantage feature of deferred accumulation of the capital gains tax. That’s a very attractive feature,? said Michael Hecht, first vice president of Merrill Lynch in Boulder. However, he also indicated that many investors were paying much closer attention to their portfolios these days.

?Risk was a word that most people forgot in the late 1990s, and it has come back to the forefront,? Hecht said. ?As a result, because of what we have seen with the companies where many investors held a majority of their assets in their own company’s 401(k) — and the best example is the Enron situation — and suffered large losses because of that, it has caused most investors to re-evaluate their situation. Unfortunately, the two things that have always driven investments are greed and fear.

?I think it’s important to understand, too, that prior to any of these situations coming up, many companies offered very diversified 401(k) plans,? Hecht continued. ?What happened, though, is that many investors go back to those basic human emotions of greed and fear. They sized up the investment results. The growth area was giving them a way above average return in terms of what the stock market had historically done, and so they decided to allocate their assets or their contributions there in lieu of maintaining a more balanced approach.?

Diversity is good. That is the baseline philosophy by which all investment professionals are consulting their clients these days. However, the 401(k) programs continue to be a steady tool for retirement for most participants.

?All of the statistics say that participants are staying the course with their 401(k) programs,? said Rick Meigs, president of 401kHelpCenter.com. ?There is a minority of participants who have either abandoned them or pulled back on their contributions. The vast majority of participants are still there, still saving, and still looking to the long term.? However, Meigs did indicate that companies are feeling more pressure to provide a responsible level of instruction about investment opportunities.

?You’re not seeing a big reduction in the companies that are matching company stock. The tax benefits are just too great for them, but they are increasing their education of participants to make sure they understand that they shouldn’t be carrying a huge percentage of company stock,? Meigs said.

Jim Cunningham of the executive placement firm Donnelly Sepp & Associates said that while 401(k) programs continue to be a standard benefit, stock options have become a far less attractive incentive than in previous years.

?I haven’t heard any negative comments about 401(k) programs, but certainly stock options are just kind of a wish and a prayer at this point,? said Cunningham, who pursues high-quality candidates for executive positions within many Boulder County companies. ?If I’m on a recruiting assignment, and we get down to the point of salary negotiation, one of the things that candidates tend to look at is the possibility of a cash signing bonus. That is not necessarily in lieu of stock options, but with the recognition that the options may or may not have any value, at least for the time being.?

?Options still play a role. If they are available, they are appreciated,? Cunningham said. ?It’s simply that there is no expectation that options will have a significant impact or comprise a significant component of an overall compensation package. It really is icing on the cake.?

Hecht stresses two ethics that are critical to sound investment strategies: proper asset allocation and personal responsibility.

?I think that individual investors all have an inherent responsibility to do their own due diligence. It’s OK to hire investment professionals, but you still have to always go back to the proper asset allocation. Most people simply don’t want to take responsibility,? Hecht said.

?When it got bad in terms of the market’s decline over the past two to three years, many people wouldn’t even open their statements because they didn’t want to see what was going on. You can’t be an ostrich and put your head in the sand,? Hecht said. ?I think the main thing is that everybody has to be accountable to themselves, first and foremost. When you give that up then you’re not always going to get the kind of results that you had hoped to achieve.?

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