The Prudent Fiduciary

Scott Pritchard | Principal

A look at the major issues that are shaping fiduciary best practices today.

Saving Participants from Themselves

August 2008

“I am a long-term investor.” The vast majority of participants in your 401(k) plan would likely agree with that statement.

But as the saying goes “Adversity doesn’t build character, it reveals it.” The market conditions of the last twelve months certainly qualify as a time of adversity. And a large number of 401(k) participants are revealing that their character actually doesn’t involve being “a long-term investor”.

According to the Hewitt 401(k) Index, participants moved $3 billion in assets out of equity investments in the first half of 2008. While no one can accurately predict when the market will turn around, we can all anticipate what will prompt those same participants to reallocate those assets back into the stock market…a prolonged run-up in stock prices.

So what we have is a classic “buy high, sell low” scenario. We see it all the time with 401(k) participants, and it is the behavior that leads to the systemic underperformance of 401(k) plans.

As the sponsor of a self-directed 401(k) plan, there are a couple of things you can do to help your participants avoid this self-destructive behavior.

1. Offer “do-it-for-me” investment options. The majority of participants don’t want to manage their own assets, so give them the option of having a professional manage it for them.

2. Provide participants with access to one-on-one advice. Numerous studies show that participants who utilize professional advice within their 401(k) plan achieve greater returns than those who do not.

If participants have ten or more years until retirement, then history shows that the equity markets will give them the greatest return on their investment. But participants have to actually be in the market to achieve those returns, and it’s up to the fiduciaries responsible for those plans to provide investment options that help them achieve their goal.

Email A Friend Print This Article