EMPLOYEE
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Bruce Williams, 65, pulled money out ofhis mutual funds years ago to make a down payment on a house. "I hate to think what those funds would be worth now."

photo by Mark Rhodes

"The worst thing you can do is pull out when the market drops," says Keith Muth of Virginia Asset Management, the firm that administers New Dominion's 401(k) and provides employee education. "This is money for retirement. It's meant to be a long-term investment. But at times like that it can be a very difficult concept to grasp." Muth and New Dominion's plan provider, The Principal Group, stress the importance of riding out the storms of volatile markets without making changes in investment strategies. But in the five years since the plan's inception, no one had ever experienced such a drop in stock prices.

"I got into mutual funds back in the '60s, when they were new and weren't really going anywhere," says Williams, now 65 and semi-retired. "So I pulled my money out to make a down payment on a house. Now I look back and say to myself, 'You idiot!' I hate to think what those funds would be worth now."

After that, Williams says he dug back into the market, adopting his current philosophy: Don't buy, sell, trade or move. He began buying again in the early 1970s, loading up on IRAs based on funds he had researched extensively, and made changes only when he found a glaring and persistent problem with a fund provider.

Williams says he and his wife have increased their net worth sixfold using this approach and adds that he knows of others who have done better. "So, when I stood up that day, I told them, 'Guys, you have to let it ride. Don't be tempted to pull your money out when stock prices drop.' If I had tried to micromanage my investments, then I wouldn't be where I am today," Williams says. "The whole point of investing in funds is to go long-term."

As of Jan. 1, all of New Dominion's eligible employees were participating in the 401(k) plan. The company matches half of the first 5 percent of income that employees invest, and workers can choose from 12 investment funds.

Not all businesses can boast such impressive participation rates. An even greater concern is whether businesses go far enough in preparing workers for retirement. How many neophyte investors will tinker with their retirement dollars and make the same mistakes Williams did -- with disastrous results?

Many benefits managers are working hard to help workers plan for a sound retirement, but there's a real possibility that all their efforts may not be enough.

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Since their inception in 1978, 401(k) plans and their equivalents -- like the 403(b) nonprofit plans and 457 deferred-compensation plans -- have continued to evolve. Most have increased the number of investment funds they offer, and most have made it easier for employees to monitor their fund values and make changes quickly.

A 1997 survey of employee savings plans conducted by William M. Mercer Inc. found that the typical number of investment options offered in a defined-contribution plan has more than doubled since 1990.

The majority also use 800 numbers that allow employees to track the day-to-day market value of their investments and make changes in their allocations over the phone. The number of plans with such phone services rose from 33 percent in 1994 to 66 percent in 1997, according to the Mercer survey. Internet links also are growing.

The people responsible for educating employees about 401(k) plans have mixed feelings about this evolution. Most say the changes were necessary to comply with the demands of employers and employees, who wanted more choices and faster response.

"It does open up the opportunity to trade on a daily basis, but it also gives people the flexibility to do a transaction when it's convenient and important for them," says Bob Lee, senior vice president of marketing communications for Prudential Institutional Investments, one of the nation's leading providers of 401(k) plans.

Opportunities to make changes in 401(k) allocations typically were once a month or even once per quarter, but Lee points out that "people's lives change, and those changes didn't necessarily coincide with the schedule of their retirement plans."

Still others say the ability to move allocations among many investment choices on a whim can sometimes sabotage long-term strategies. New Dominion's Giberson admits this plan feature may have made a few employees more antsy and prone to switch in response to market changes. "We do have some people here who do that," he says.

"Sadly enough, when markets correct, the wrong people tend to get in and out at the wrong times," says Raymond M. Slabaugh III, a principal of the Richmond benefits consulting firm Slabaugh Morgan White & Associates.

John Pinto, marketing director for Prudential's Virginia office, says a decision based on short-term market performance can have devastating long-term effects. "Take a 30-year-old who's never experienced a market downturn. He might panic and move his money to more conservative funds. Then, five years down the road, the market has recovered and his investments are still too conservative. He's lost the opportunity to get a good return on his investment," Pinto says.

Slabaugh attributes such haphazard investment decisions in part to the fact that 401(k) plans have thrust many employees into unfamiliar territory. "In the past, employers never thought of letting employees invest their retirement money, but with 401(k) plans they've turned over the fiduciary responsibility," Slabaugh says. "Now, in many cases the only commitment of the employer is the match, which only applies to employees who can afford to invest. Employees are now responsible for all of the decision-making."

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People who have the nerve to ride out market storms still have to find investment strategies that suit their needs. Employees are being asked to analyze their lifestyles to set up their investment allocations, and to decide when changes in their lives should prompt changes in fund allocations.

Slabaugh contends that the increasing number of investment options available in 401(k) plans has complicated decision-making. People have too many choices and too little information.

"I believe offering so many funds just increases the chances for a wrong decision," agrees Prudential's Pinto. "Give me a plan with 20 choices and a plan with eight, and I guarantee you the employees' asset allocations will be better in the plan with eight."

Even with fewer investment choices, the Mercer survey found, "there is room for improvement in how educational materials describe these options. For example, funds are commonly distinguished as 'conservative,' 'moderate' or 'aggressive.' Many people take these terms personally and literally. Few people think they are 'aggressive,' although their investment circumstances suggest they should be."

Even when workers follow good investment advice to the letter, they may still be losing out on some cash. A 1997 study by the consulting firm Watson Wyatt Worldwide showed that from 1982 to 1997, conventional defined-benefit retirement plans, the kind managed by employers, did 2 percent better than employee-managed defined-contribution plans. Such a difference in plan performance could result in a huge difference in retirement income.

If an employee were to invest $2,000 a year for 30 years with an 8 percent return, he'd end up with a tidy $226,566. Invest that same $2,000 for the same 30 years with a 10 percent return, and that retirement nest egg is $328,988.

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Five years ago, concern about employees' investment decisions prompted Mitsubishi Chemical America to take another look at its 401(k) plans, says John Canfield, senior vice president of administration for the Japanese-owned manufacturing firm. Each of Mitsubishi's nine U.S. plants -- including the one in Chesapeake that produces aluminum building materials, copier parts and toner -- had its own separate plan.

"One thing we found ... was that people were thinking very conservatively about their investments," Canfield says. "They were putting a lot of their money into fixed-income funds, which typically earned about 4 percent, and they were missing a lot of good opportunities to do much better."

After reviewing proposals from five potential carriers, Mitsubishi selected Prudential Institutional Investments to provide a plan and an education program. Canfield says Prudential has turned the tide since it took over in 1994.

"Before, our employees generally were afraid of the stock market," he says. "They saw it as the rich man's choice. We began making the point that since 1929, the stock market has gained an average of 10 percent a year, a whole lot more than their fixed-income investments, and we have seen a significant change in our investment mix. People have moved toward the mutual funds."

Like many fund providers today, Prudential offers Mitsubishi employees and other clients computerized investment modeling. A worker can plug in information about himself and his financial status, and the program will predict retirement income from various allocation choices.

Some take that model a step further to produce actual recommendations for fund choices within a particular 401(k) plan. This approach is gaining favor among some employers who want to make sure they are fulfilling their obligation to provide adequate investment information. Officials from Dynex Capital Inc., a Richmond-based real estate investment trust, say they have asked Slabaugh and their 401(k) provider, Principal Financial Group, to investigate the possibility of offering real investment counseling.

In recent years, the U.S. Labor Department has relaxed its position on this issue. In 1996, it warned employers that they might be considered fiduciaries, rather than merely sponsors, if they did more than provide general education about 401(k) plans. Labor officials said plan sponsors could assume legal liability for failed investments based on their recommendations.

But now Labor Department officials are cautiously permitting certain qualified, independent advisers to counsel 401(k) participants. Some fund providers have even been exempted from the prohibition against giving advice about their own funds. First they must satisfy federal officials that their recommendations do not necessarily steer employees into funds with higher commissions.

According to the Cambridge, Mass., technology firm, Forrester Research Inc., 14 percent of 401(k) plans now offer such investment advice. Other companies have tried to make decision-making easier by offering "life-cycle funds," groups of funds that provide an array of investments suited to certain lifestyles.

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There is some good news: The Mercer survey reports a rise in employee allocations to equity funds, from 38 percent of total fund contributions in 1995 to 44 percent in 1997. Combined with a drop from 21 percent to 18 percent in allocations to fixed-income funds, these numbers seem to indicate people are willing to assume more risk in exchange for a shot at higher retirement income.

But regardless of the number of choices, the nature of the choices or the current state of the Dow Jones Industrial Average, Slabaugh contends that the real issue is that many employees continue to contribute too little toward their own retirement. Some may struggle with their fund decisions, but others struggle with whether to invest at all.

Maybe more businesses need workers like New Dominion's Williams. "The important thing is to get your money into the market, even if it's high when you get in, and even if you can only afford $10 a week," Williams says. "There's not a working person out there who can't find a way to set something aside for retirement."