Today's 401(k) Investor Moves Money, Seeks Advice

Thanks to the financial crisis, 401(k) investors have changed from passivity to take-charge activity.

During the market volatility of 2008 and 2009, investors actively managed their 401(k) retirement accounts, shifting existing account holdings in and out of stocks, redirecting the course of future contributions and making more use of investor tools to help them, according to data from Prudential Investment Management (PRU), Fidelity Investments and Charles Schwab (SCHW).

Starting in the second quarter of 2008, investors in Prudential's 401(k) plans began moving their existing investments out of equities and into bonds.

"Generally, participants moved out of options that were viewed as high risk and moved into options that were less risky, like stable value," according to James Cornell, senior vice president and chief marketing officer of Prudential Retirement.

Stable Value Funds Surge

Stable value funds, which are primarily fixed-income investments that provide a minimum guaranteed return, made up about 26% of Prudential's 401(k) account assets in the second quarter of 2008. But this percentage rose to a high of 44.5% in the first quarter of 2009 when the stock market hit bottom in March. Since then, investments held in stable value have declined, standing at 37% currently.

Prudential's 401(k) investors also moved more money into fixed-income funds, boosting them from 6.5% of assets in the first quarter of 2008 to a peak of 8.8% of assets in the first quarter of 2009. Fixed income accounts for 8.5% of assets today.

Conversely, Prudential's 401(k) clients moved money out of large cap stocks and international stocks. Total 401(k) assets held in large caps dropped from 31% in the second quarter of 2008 to a low of 22% at the market bottom in the first quarter of 2009 before rebounding to just over 25% today.

International stocks fell from 10.1% of total 401(k) assets in the second quarter of 2008 to a low of 6.3% in the first quarter of 2009 before recovering to just over 8% of assets today.

Investors Become More Risk Averse

Cornell says the moves out of equities and into stable value reflects investors' attempts to avoid risk while trying to earn a minimum return on their investment.

"They were trying to move out of equities to protect their portfolios and into a more conservative, guaranteed vehicle," he says.

Investors at Fidelity were also moving their 401(k) funds out of equities and into fixed income as the financial crisis erupted in the fourth quarter of 2008. In October of that year, 6.6% of Fidelity's 11 million 401(k) participants shifted funds from equity accounts into cash or fixed-income accounts.

Beth McHugh, vice president of market insights at Fidelity, says the percentage of people shifting assets out of equities declined through the first quarter of 2009 when the market hit bottom, but investors still continued contributing to their plans.

"Many people stayed the course," McHugh says. "They didn't take the money and put it somewhere else."

Staying the Course

The fact that many Fidelity investors kept their money invested helped the average 401(k) account balance rise 28% in 2009, jumping to $64,200 from $50,200 in 2008. Helping 401(k) accounts grow robustly in 2009 were the market rally that lifted the S&P 500 by 66% from its low in last March, investors' continued contributions and the benefits from employer match programs, says McHugh. But she gave much of the credit to "investors staying the course."

Investors at Charles Schwab were also interested in avoiding risk and staying the course during the fourth quarter of 2008, but in a slightly different way. By the end of the year, Schwab investors has shifted about 25% of all future investments in their 401(k) accounts out of equities and into fixed income.

"We saw a quarter of the new contributions coming in shifting away from equities and into fixed income and stable value," says Catherine Golladay, Charles Schwab vice president of 401(k) participant education. "The good news is that you can infer that investors are making smart decisions -- they are not locking in their losses on any investments that may not have rebounded.

"But the cautionary side to that is, for people who have a long time horizon before retirement, a much heavier weighting in fixed income and stable value may have a negative impact on their retirement savings long-term," Golladay says.

Using Reallocation, Online Tools

Fidelity 401(k) investors also began reallocating and increasing their contribution rate in the second, third and fourth quarters of 2009. Prudential investors appear to have been reallocating all through the process.

All three investment companies offer online tools to help investors decide what they should do with their money and when. All three report an increase in the use of those tools and investment advice services over the last two years. Fidelity says 1.2 million clients used its tools to make investment decisions last year. Schwab says there has been a 6% increase in people taking advantage of tools like advice or managed accounts since last year.

Still, not all investors benefited from last year's rally. But Cornell believes the increased use of the advice and tools means that 401(k) participants are now actively looking to move back into the market. It also suggests that they are more involved in managing their retirement than ever before.

"We are strongly advocating that investors have asset allocation that is age appropriate for them," says Cornell. "You can do it through the underlying investments, through a balanced fund or through a target date fund, but now is the time to rebalance your portfolio."