We’re Smarter About Joining 401(k)s but Dumber About What’s in Them

On a positive note, here’s what we do know about our company-sponsored 401(k) plans:

By now, most of us realize that participating in these tax-deferred retirement accounts is a good thing.

And once money is in a 401(k), the vast majority of us know not to touch it until we absolutely need to. A recent study showed that only 18% of plan participants eligible to take out loans against their plans actually do.

What’s more, most of us have learned the importance of putting at least some of our retirement money into stocks and stock funds, since history has shown that over time, nothing grows a nest egg like equities. Today, stock investments represent a greater portion of 401(k) assets than ever before.

Unfortunately, we seem to know surprisingly little else about our 401(k)s and the investment options in them. In fact, we seem to know even less about our plans today than we did in 1995. That, according to a national survey of 401(k) plan participants commissioned by John Hancock Financial Services in Boston.

“The results were absolutely amazing to us,” said Wayne Gates, general director for John Hancock who oversaw the survey. “And they were kind of discouraging.”

Somehow, after four years and millions of dollars spent on investor education, we’ve managed to get dumber. (I guess all those scintillating brown-bag seminars at work on 401[k] investing aren’t doing the job.)

Which is all the more dangerous since, as we’ve just mentioned, many of us have more of our retirement money than ever before in stocks as opposed to less risky fixed-income investments.

Plan “participants are now investing nearly 76% of their contributions in equity options,” said Catherine McBreen, who heads the retirement services consulting practice for Spectrem Group, a San Francisco-based firm that tracks the 401(k) market. Five years ago, by contrast, less than two-thirds of plan contributions were going into stocks.

Some highlights (or lowlights) from the just-released Hancock survey:

* 41% of plan participants believe, incorrectly, that money market mutual funds invest in stocks. “Maybe they see the word ‘market’ and assume it refers to the stock market,” said Gates. This might explain why more than a third of plan participants invest some portion of their plan assets in money market funds.

* 60% of plan participants believe, incorrectly, that you can’t lose money in a government bond fund. In 1994, 86% of all government bond funds lost money, according to fund tracker Morningstar.

* Also, nearly 85% of respondents didn’t know that it’s best to invest in bond funds when interest rates are expected to fall, not rise.

* 8% think, incorrectly, that stocks can’t lose money.

* And, on average, plan participants believe, incorrectly, that investing in a diversified stock fund is riskier than investing in their own company’s stock.

This belief is stronger today than it was in 1995, which may explain why so many plan participants are loading up on company stock.

According to a recent study by the Employee Benefit Research Institute in Washington, in plans in which company stock is offered as an option, participants invest nearly $2 out of every $5 in company stock.

(In general, financial planners warn against loading up on company stock, because it puts too many of your eggs in one basket. Not only will your retirement savings be dependent on the fortunes of that single company, but so, too, will your income, benefits and job security.)

So much for investor education.

The study also tells us something we didn’t know about 401(k) investors. Following last year’s late-summer market slide, and given the frothiness in the stock market, a majority of 401(k) plan participants now say they would shift at least some of their accounts out of stocks, or at least not add to their position, if faced with a serious drop in the market.

In the past, plan participants have said they would stay put or even “buy on the dips.”

About half those surveyed by John Hancock said they would rethink their stock strategy after a 20% drop in the market. A whopping three-quarters said they would shift out of stocks in the event of a 30% decline.

“It’s kind of scary in a way,” said Gates. “An investor with a well-defined asset allocation strategy and a fundamental understanding of equities as a long-term investment might see a market drop as a buying opportunity, or at least as a time to sit tight.”

*

Now a confession. There’s something I didn’t know about 401(k)s that’s worth mentioning.

According to the Internal Revenue Service, plan participants who turn 59 1/2 and continue to work at their companies are allowed, in same cases, to roll their 401(k) assets over into an individual retirement account, without triggering taxes.

But that’s only if the employer allows employees to take money out of their 401(k)s, for whatever reason, after they turn 59 1/2. Some companies say you must retire or leave the company, even after hitting 59 1/2, before you can do this. (Money actually withdrawn from either a 401[k] or an IRA is taxable income, but there is no 10% penalty after the age of 59 1/2.)

The good news is, nearly 70% of employers allow workers to take money out of their 401(k)s for any reason after turning 59 1/2, according to Buck Consultants, an employee-benefits research firm based in New York.

An IRA rollover may be a good deal, especially if your plan has poor investment options and high fees.

Paul J. Lim can be reached at paul.lim@latimes.com. “Maximizing 401(k) and IRA Plans” is one of the panels offered at The Times’ third annual Investment Strategies Conference, May 22-23 at the L.A. Convention Center. For information, call (800) 350-3211 or go to https://www.latimes.com/isc.