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Stock Funds Drive Growth In Retirement Plans...And Vice VersaBy Werner Renberg
In fact, nothing has contributed as much to the increase in fund ownership during these boom years. Fortunately, those years coincided with the period when many employers provided funds as options when offering participant-directed 401(k) or other defined contribution plans instead of (or in addition to) employer-directed defined benefit pension plans. Now, a new report put out by the Investment Company Institute and the Securities Industry Association shows just how important mutual funds have become to the growth of employer-sponsored retirement plans -- and vice versa. Among the estimated 41.8 million households that owned stock mutual funds in early 1999, the study found, 28.5 million owned them inside such plans. That was slightly more than the 27.8 million who owned stock funds outside such plans -- whether in taxable accounts or in other types of tax-sheltered accounts, such as traditional IRAs, which are not sponsored by employers. About one-half owned them both inside and outside; slightly more than one-half owned IRA’s. (An estimated 43 percent also owned individual stocks -- including those of employers -- inside and/or outside employer plans.) If you own shares of stock mutual funds in your employer’s plan, are you a typical plan participant? The survey found that the typical such investor: o Is 44 years old. (Among those 54 or younger, about two-thirds own them inside plans. For those 55 to 74, the share goes down to 47 percent; for those 75 or older, it falls to 12 percent.) o Has household income of $63,000 and household financial assets of $80,000. o Made his or her first purchase of an equity-type investment when, in taking advantage of the opportunity to participate in the plan, he or she chose a stock mutual fund; has owned stock fund shares inside the plan for 8 years. o Has $30,000 in stock mutual funds inside the employer’s plan. (One in six have less than $5,000; one in five have more than $100,000.) o Owns three stock mutual funds inside the plan. Nearly one-half own only one or two; one in six own six or more. o Owns at least one international or global stock fund inside the plan. o Also owns other types of mutual funds, inside and/or outside the plan: 17 percent own bond funds -- twice as many as own individual bonds -- 43 percent, hybrid funds, and 27 percent, money market funds. Employers who had been concerned that employees would change their contributions or asset allocations too frequently if given the opportunity to do so apparently need not have worried. The survey found that only one in four who own stock funds in plans made changes in their contributions in 1998. Of those who did, 68 percent made only one stock fund change and 22 percent made two. (Whether the number of changes would have been greater if the stock market had not performed as well as it did last year cannot be known.) While the ICI-SIA survey disclosed a lot of information about retirement plan participation that had not been previously made public in such detail, it apparently did not explore other relevant topics, such as how plan participants felt about the fund options provided by employers, the performance of the funds which they chose from among the options, and the costs that may be associated with fund ownership. Judging by occasional reader complaints, it would appear that at least some participants are unhappy with the fund companies their employers have picked, with the choices of funds from among those managed by the companies, and with the costs they sometimes have to absorb beyond the funds’ own operating costs. (The Labor Department has thus far not responded to calls for greater disclosure of costs to plan participants that were made by the ICI and others at its hearing on the subject two years ago.) Whatever the merit of such complaints, the growth in fund ownership inside employer-sponsored retirement plans on which the survey reports clearly indicates that many -- probably most -- participants find the plans an attractive way of accumulating capital toward retirement, the principal goal. It suggests that, if you are not already taking advantage of what your employer offers, you should seriously consider doing so -- and that, if your employer does not yet offer a plan of any kind, you may wish to lobby for one. Required by law to make periodic cost-of-living adjustments in the maximum amounts that participants may contribute and deduct from taxable income each year, the Internal Revenue Service recently announced that it was raising the limit from $10,000 to $10,500, beginning this year. If you can’t spare that much, start with a smaller sum -- but start. Copyright © 2000 Werner Renberg. Reprinted with permission. More articles by Werner Renberg can be found here. Disclaimer:
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to continued economic expansion and rising stock prices, few factors
have been more influential in recent years in enhancing the retirement
income prospects of millions of working Americans than the ability to
invest in mutual funds and individual stocks in tax-sheltered
retirement plans sponsored by private and government employers.