Human Capital & Careers

Long-term 401(k) Lessons

Employers need to teach employees how to weather the downturn in the stock market.
Lisa YoonJanuary 10, 2001

When the economy booms for as long as it did most recently, it’s easy to forget certain basics. That companies are supposed to make money is one that many painfully remembered in 2000. Others include the fact that the stock market goes up and down. Still another is that retirement plans are for, well, retirement.

Employers need to impress these last two principles on employees now in educating them about 401(k) investments. With the market in a downturn, many employees are concerned about their 401(k) holdings.

Some younger employees may never even have seen a market decline in their professional lives. For them, the first impulse may be to sell. Don’t, say experts.

“All that does is lock in losses and prevent the investor from reaping rewards when the market grows again,” says Martha Priddy Patterson, national director of employee benefits policy at Deloitte & Touche LLP. “Markets decline, but they also rise again.” She says basic investment education, including historical review of past market performance, can go a long way in preparing employees for market downturns.

Mike Scarborough, chief executive officer of the Scarborough Group, an Annapolis, Maryland- based 401(k) consulting firm, agrees. He also says that companies need to impress upon employees that a 401(k) is a retirement plan. That means investments are long-term.

One way to make this clear is the name of the plan itself. “Many corporations have named their plan ‘XYZ Savings Plan.’ Well, this is not a savings plan. It’s a long-term retirement plan, and they need to get that point across.”

Beyond that, he says, companies should urge employees to monitor their plans and set goals. “When you’re 25, your goals are clearly long-term. When you’re 60, you’re closer to having shorter to immediate term needs. You have to make [investment] adjustments accordingly.”

Wherever employees are on the road to retirement, companies should encourage them to choose a mix of investments. This doesn’t mean offering a dizzying array. According to Deloitte & Touche’s Patterson, offering too many choices could confuse employees, rather than help them diversify. She recommends against offering more than a dozen choices. Instead, make sure the existing offerings represent a range of types.

“Diversify, diversify, diversify,” says Mike Scarborough.

“Obviously, taking a look at large-cap [mutual] funds that are pegged to the S&P 500 certainly should form a basis for the plan. Then we should start spreading out other asset classes,” he says. He also suggests a mix of international and bond funds. “You may want to weight your portfolio neutrally between value and growth and not try to skew your portfolio one side or the other.” One thing he says should not be offered is individual stocks, especially the company’s own, arguing that such issues create an inordinate amount of risk. He cites a study by MFS Mutual Funds that showed that thirty-one percent of all the stocks that have existed for the last five years have had negative annualized returns during that five-year period.

In contrast, only .33 percent of mutual funds had a negative return during that same period. This is not a popular view with corporations, 92 percent of which offer their own stock in their 401(k) plans, he acknowledges.

But companies have enough outlets for the sale of their securities, without additionally offering them in the 401(k) plan, he says. “If you’re trying to aid your employees in their long-term retirement planning, you’re hard- pressed to find justification for single-stock issues,” he adds.

Education involving 401(k)s needn’t be more complicated in a market downturn. But advising employees of the basics concepts of diversification and stock market fluctuation can prepare them for downturns and encourage them to invest wisely whether the market is up or down.

As for right now, it’s best to encourage employees to be patient. “This is not a time to go running to the hills,” says Scarborough. “This market’s going to turn around. Trying to guess what the market’s going to do is a fool’s game. Take your time, and invest your money properly. On a long-term basis, people are going to be fine.”

4 Powerful Communication Strategies for Your Next Board Meeting