It’s a Long-Term Investment – And Other Things to Tell Your Employees About 401(k)s

Even though it has rebounded a tad, who was able to predict that the NASDAQ would shrink so much from its high? Would anyone have believed that terrorists could kill thousands, destroy symbols of American capitalism, and place our country at the brink of war?

No one was able to predict the events that have shaken our economy and caused extreme volatility within markets, just as no one can truly predict when we will recover and stabilize.

   But when your plan participants come to the HR office with concerns about the security of their retirement, you should be able to directly answer their questions with assurance and confidence.

To help answer the questions your employees are likely asking of you, The Scarborough Group has put these recommendations together for Workforce magazine readers and online users. Feel free to share these with your plan participants:

1. A 401(k) is for your retirement

   
   

   Your 401(k) participants should consider this adage when investing, “Success comes from time in the market, not timing the market.”

   
   

   Obviously, recent events have people concerned about the security of their investments, but history has shown us that the markets have survived.

   
   

   The average loss for the market after catastrophic events (e.g. Pearl Harbor, the Cuban Missile Crisis, John F. Kennedy’s assassination, the 1993 World Trade Center bombing, The Asian Stock Market crisis, etc.) was approximately 8.1 percent? However, the market was up an average of 4.2 percent 22 days after the event, up 6.7 percent after 63 days, and up 12.9 percent after 126 days, according to Van Kampen Investments. Of course, past performance is not indicative of future results.

   
   

   401(k) participants need to recognize that missing out on just a few days in the market could cost them.

   
   

   For the ten years ending September 30, 2000, if they had…

   
   

   Annual Return
   Remained fully invested	19.4%
   Missed the best 10 days	14.7%
   Missed the best 20 days	11.5%
   Missed the best 30 days	8.7%
   Missed the best 40 days	6.2%

   On a $10,000 investment over these ten years it breaks out like this…

   
   

   Remained fully invested	$58,890
   Missed the best 10 days	$39,413
   Missed the best 20 days	$29,699
   Missed the best 30 days	$23,030
   Missed the best 40 days	$18,249

   Missing the best 40 days out of a possible 3,560 would have cost a participant $40,641-about $1,016 per day missed. The worst days are the hardest to bear, but it may be worth riding them out. The information in the chart above comes from the Evergreen Funds and is based on the S&P 500 index. Investors cannot directly invest in the S&P 500.

   
   

2. Maintain proper diversification

   
   

   Your participants need to understand that being properly diversified can help them weather the financial storm.

   
   

   Major asset classes tend to alternate in performance. In 2000, small cap value funds led with a 22.83 percent return, while small cap growth was down 22.43 percent.

   
   

   But the prior year, small cap growth funds had return of 43.09 percent and small cap value was down 1.49 percent. If a participant had a blend of small caps for their allocation, the small cap portion for the two years would have been 21.04 percent.

   
   

   During that same period if they only invested in growth funds, they would have had a return of 10.99 percent, and if they only invested in value, the return would have been 20.9 percent. The source of this information is SunAmerica Mutual Funds, and once again, past performance is not indicative of future results. And it’s important to remind participants that asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns.

   
   

   Participants can certainly look beyond small growth and small value funds for their portfolios, and can consider all asset classes and styles depending on individual objectives and risk tolerance.

   
   

3. Revisit your risk tolerance.

   
   

   It’s one thing to be a bull in a bull market, but the true test of one’s risk tolerance is in a bear market.

   
   

   Time is likely the most important factor in determining tolerance to risk. But participants must also take into consideration their comfort level. If an investor cannot tolerate fluctuations in portfolio value, it may be time to reallocate assets into more conservative investments.

   
   

   There are countless combinations of investments available, however, many can be too aggressive for an individual investor. Often when situations change, participants may need to revisit their allocation and make sure it is appropriate for their needs and goals.