Come January, Eastman Kodak Co. is expecting a cloud of confusion to descend upon its 62,000 U.S. employees and retirees as the number of investment options in its 401(k) retirement program grows sixfold, to 36 from six.
“We expect, No. 1, that some people will be intimidated, and, No. 2, that there will be confusion and some people will not understand what’s going on,” said George Dascoulias, project manager for retirement and savings plans.
The Rochester, N.Y.-based photographic products company will run a full month’s worth of workshops, he noted, to explain the three-tiered program, whose levels he described as “simple,” “choice” and “lots of choice.”
But the expected befuddlement will be worth it, company officials believe, if the conservative investor diversifies beyond fixed-income offerings and the more investment-savvy participant feels less constricted.
Although Eastman Kodak’s revamp is notable for its sheer scale and ambitiousness, it is to a large degree reflective of changes taking place nationwide within companies’ 401(k) programs– shifts toward more choice and employee responsibility, and greater emphasis on stock-based investing, where the risks and potential rewards are significantly greater than in fixed-income options.
Indeed, the stock market’s phenomenal gains this year have made it all but irresistible. “Now it’s hard to find someone who does not like stocks, due to the runup,” said Jim Sullivan, a principal in the 401(k) practice of Arthur Andersen LLP in Chicago. “We worry about people becoming too enamored of the stock market.”
Nevertheless, when investing their 401(k) contributions, “clearly, people want choices,” said David Wray, president of the Profit Sharing/401(k) Council of America, a Chicago-based advocacy group. “They want to feel empowered, in control of their money.”
Study after study released this year indicates an increase both in the number of investment options offered by 401(k) plans and in the proportion of money that participants are allocating to equity funds.
A nationwide survey of 743 employers released this month by New York-based benefits consultants Foster Higgins found the average corporate savings plan offers 7.7 investment options, up from 6.3 last year and from 4.0 five years ago.
A separate survey, by Access Research Inc. of Windsor, Conn., indicates increased availability in plans of virtually all types of equity funds, particularly international and global funds, and a decreased availability of guaranteed investment contracts, in which the principal and interest are guaranteed by the issuing institutions.
The Access Research survey of 401(k) participants also shows a marked increase in willingness to take risks. The percentage of participant contributions directed to equity funds rose to 73.1 percent in 1996 from 64.4 percent in 1994, with significant increases in percentages allotted to aggressive growth and international/global funds. Meanwhile, the proportion directed to stable value, bond and balanced funds fell.
“Clearly, the education process of employers is making an enormous difference,” Wray said, “and the market being so strong is encouraging people to get on board where they may have been timid in the past.”
The stock market’s performance has certainly influenced Angela Cygnar, a 52-year-old copywriter and editor for the Reliable catalog division of Boise Cascade Office Products Corp. in Schaumburg.
“Everything I read says that over the long haul, the stock market is where to be,” said Cygnar, who invests 60 percent of her 401(k) contribution in a diversified equity fund and 40 percent in a balanced fund, which contains stocks and bonds. “I figure I have 10 to 12 years before retirement, so I’m aggressive.
“For a while, I had 10 to 20 percent in a bond fund for security, but it wasn’t doing anything.”
John Mahoney, a program director for Chicago-based Coregis Insurance Group, is taking an even more aggressive approach, splitting his contribution “basically 50-50 between a reasonably aggressive growth stock fund and an international stock fund.”
“I’m not all that risk-averse,” he said. “I’m 30 years old, recently married but with no kids, so I have more latitude to take more of an equity position.
“Until last year, I was only in U.S. stock funds, but in the past year, my perception has been that it made sense to switch and get into world markets. I think the growth potential for these economies exceeds that in the U.S. economy.”
The decisions employees make regarding investment of their 401(k) contributions are of increasing importance to their financial futures as the continued viability of Social Security hangs in the balance and as cost-conscious corporations move away from traditional pensions and toward programs stressing shared responsibility.
The savings plans take their name from an obscure portion of the Internal Revenue Service code that allowed their creation more than a decade ago. The way 401(k) plans work, generally, is that employees contribute a fixed percentage of pretax income, and that contribution often is matched to some extent by a company contribution. The funds are invested, and grow tax-free, until withdrawal.
Last year, more than 22 million Americans participated in 228,000 plans, with assets totaling more than $675 billion, according to Access Research. By 2001, the firm estimates the number of Americans participating in 401(k) plans will grow 27 percent, to 28 million, and that the number of plans will increase 43 percent, to 326,000. Assets are projected to more than double, to $1.47 trillion.
Among the companies preaching personal responsibility in retirement planning has been Rolling Meadows-based Whitman Corp., a holding company for Pepsi-Cola General Bottlers, Midas International and Hussmann Corp., a commercial refrigeration business.
“We have a modest pension plan and we don’t subsidize medical care in retirement, so an employee’s obligation to accumulate capital is stronger here than at other companies,” said Ray Werntz, vice president of compensation and benefits at Whitman, which has 11,000 U.S. employees.
Whitman revamped its 401(k) plan several years ago and, counter to the more-choice trend, Werntz advocates simplicity: “Companies are fearful of guiding the thinking of their employees (for liability reasons), so they give them tons of options. Our experience has been you can give too many choices, and confuse them.”
Whitman offers just four options, all “lifestyle” portfolios–pre-mixed packages ranging from conservative to aggressive–that were put together by outside contractor EFR Asset Strategies in Oak Brook. Employees select a portfolio based on their stage in life and their risk tolerance.
“At the time, we were probably the second company in the country to do this,” Werntz said. “It was very radical stuff.”
Some other financial advisers agree that companies may not be helping employees by offering more and more choices.
“Some plans offer 20 choices and employees can’t understand the differences; they’re too subtle,” said Bill Chapman, president of the Retirement Plans Group of Zurich Kemper Investments Inc. in Chicago. For example, a company may offer a U.S. government securities fund and a U.S. mortgage fund. “This takes a technical explanation, and that doesn’t do well on the shop-room floor.”
Bob Dodd, a principal at Lincolnshire-based consultancy Hewitt Associates, agrees that lots of choices can be “incredibly confusing” if they are presented as a straight lineup of 30 to 40 funds.
“But if they are categorized and communicated to participants so they understand where they enter the lineup,” the decision-making should be relatively easy, said Dodd, whose firm helped in the design of the three-tier Eastman Kodak program.
“We hope that people will self-select into the tier appropriate to themselves,” said Kodak’s Dascoulias.
The first tier is the simplest, offering three lifestyle portfolios. The second tier is similar to a typical 401(k) plan and offers six choices: a fixed-income fund; Kodak stock, and four index funds, including two equity, one international and one bond fund. The third tier, for more sophisticated investors, offers 27 managed funds.
“Employees are not locked into any one tier,” Dascoulias said. “They can mix and match among them.”
But will a plethora of choices translate into better returns for participants?
“That’s what this is all about and why it’s being done,” Dodd said. “We have seen a shift out of fixed investments and into equities and that will help in the long term, but whether lots and lots of funds versus five to 10 funds will help, it’s too early to tell.”
Employees appear to be taking cues from their companies’ investor-education programs and diversifying their holdings, placing bigger slices into equities. And although this is widely seen as a good thing, industry observers caution that participants may have unrealistic expectations about stock market performance.
“I think there is some naive money in 401(k)s,” said Chapman of Zurich Kemper, which provides 401(k) services to about 7,500 firms, most of them with smaller plans. He notes that three-fourths of the money in mutual funds has flowed in since the last big market correction in 1990.
The true test of whether employee-education programs have been successful will come when the market turns down, observers say. The fear is that people will buy high, sell low and retreat into fixed-income investments, setting themselves back in a big way.
“There is concern,” said Whitman’s Werntz, “that if there’s a meltdown, people will run, and from a long-term perspective, that’s not a good thing to do.”
