By JASON ZWEIG
How will 401(k) investors react to the latest blast of volatility in the markets?
If the recent past is any guide, they will retreat into the apparent safety of cash, Treasury bonds and "stable value" mutual funds.
They also will put money into their own company's stock, which can be far riskier than leaving it in a typical stock mutual fund.
WSJ columnist Jason Zweig discusses the hottest new investment in 401(k)s: company stock, due to workers's belief that their own company is one of the safest options available during choppy economic times. Photo: Reuters.
In August, when the Dow Jones Industrial Average went bucking up or down by at least 400 points on six out of the month's 23 trading days, investors pulled out of every variety of stock fund, according to the Aon Hewitt 401(k) Index, which tracks the daily transfers of some 1.5 million participants in retirement plans nationwide.
That movement wasn't a tidal wave; investors moved about 0.5% of their total assets, or $580 million. Half of that went into bonds, but fully 23% landed in company stock.
Likewise, in September, when stock indexes slumped by 6% or more, retirement investors put a startling 35% of the money they pulled out of diversified stock funds into the shares of their own company.
But while investing in your company's stock might feel safer than betting on the stock market as a whole, that is usually an illusion. The return of the overall market tends to be driven by a few big winners -- and, if your own company doesn't end up among them, you will miss out.
Brian Wenzinger of Aronson Johnson Ortiz, a money manager in Philadelphia, estimates that only 13% of the companies that made up the broad-market Wilshire 5000 index generated higher returns over the past decade than the index itself.
What's more, you already work at your company; do you want your salary and your retirement fund riding on the same risk?
Pamela Hess, director of retirement research at Aon
Hewitt, says investors are making this seemingly safe but potentially much riskier choice out of confusion and uncertainty. "The No. 1 response we get in [investment] surveys of employees is, 'I don't know what the right thing is to do in these markets,'" she says. So investors are moving more of their money extra-close to home. "It's just an emotional thing," says Ms. Hess. "They feel connected to their own company's stock, so it feels safe and secure to them."
That appears to be true even among people who, above all, should know better: the employees of big banks and brokerage firms, many of whom earn their living by advising clients not to put too much money in the shares of the companies where they work.
"It's a pretty concentrated problem," says Shlomo Benartzi, a finance professor and expert on 401(k) plans at the University of California, Los Angeles. "A few companies have lots of company stock, and ironically, employees at some financial-services firms have huge exposure."
At the median 401(k) plan offering company shares, 12% of assets are in the employer's stock, according to the Plan Sponsor Council of America. That is down by nearly half from a decade ago, although it tends to remain higher at larger employers -- including many major financial firms, where workers are deep into company stock, according to public documents.
At year-end 2010, employees at Franklin Resources, the mutual-fund manager, had 14% of their 401(k) assets in the company's own stock; at TD Ameritrade Holding, the discount broker, 15% is in the firm's own shares; at Bank of America, 16%; at J.P. Morgan Chase, 19%; at both Charles Schwab and Bank of New York Mellon, 22%; Morgan Stanley, 24%; Wells Fargo, 29%; U.S. Bancorp, 32%.
At many of these companies, spokesmen say, allocations are high because the firms match -- or used to match -- their employees' contributions with company stock rather than cash. If your company matches your contributions in shares of its own stock instead of cash or a diversified fund, you are likely to leave the money there. Through sheer inertia, dollars tend to stick where they land, in what economists have christened the "flypaper effect."
At several big financial firms, the numbers have come down so far this year as the companies continue efforts to encourage workers to diversify.
Sometimes, however, the market forcibly reduces these exposures; with Morgan Stanley's shares falling 48% this year, they probably make up less than 15% of 401(k) assets at the firm now. The bank's employees have lost an estimated half-billion dollars on the stock so far in 2011.
If the latest market madness has you running for cover, find it in bonds or a blended "lifecycle" fund -- not your company's stock. And if your employer matches your contributions in its own shares, move them into more-diversified funds on a regular schedule whenever company stock exceeds 15% or so of your 401(k). Don't let yourself get locked up too close to home.