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Survey shows 401(k) plans more flexible now

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When it comes to investing in a company's 401(k) plan, employees have more options to choose from and can make daily transfers between accounts more often than ever before.

That conclusion is according to a survey conducted by Hewitt Associates of employers across the country with a combined total of about 2.8 million participants and $177 billion in assets.

Employees have an average of about eight 401(k) investment options to choose from, up from 6.3 in 1995 and 4.5 in 1993. And employees have greater power to move money between accounts: nearly two-thirds of employers allow employees to transfer existing balances between investment funds on a daily basis, up from 41 percent in 1995.

The percentage of plans valuing fund balances daily rose sharply again, going to 71 percent of plans this year, from 52 percent in 1995.

"The increase in 401(k) investment options is clearly a response to employee demand," said Stacy Schaus, a 401(k) consultant at Hewitt Associates. "Employees are asking for more choices in an attempt to diversify what in many cases is their largest asset."

As a result of more choices and greater opportunities to move funds between accounts, employers have stepped up their investment education efforts. Fully 86 percent of surveyed employers have made efforts to educate employees about 401(k) investing in 1997, or expect to this year.

"As 401(k) plans become more complex, employers are increasing their efforts to help employees make the most of this benefit," said Scott Peterson, also with Hewitt Associates. "For example, many provide asset allocation and portfolio investing examples to employees, both of which can be valuable components of an effective investment education program."

Slightly more than half of plans provide participants with sample investment portfolios. This is a significant increase from the 1995 survey in which 36 percent of plans said they provided sample portfolios.

Investment education may have had a positive influence on the way employees handled the stock market turbulence in October: the vast majority of employees "sat tight" and resisted the urge to move or withdraw their funds.

Hewitt Associates calculates a daily index of participants' trading activity. This index covers 40 daily valued clients, with $50 billion in assets.

On Oct. 28, 1997, (the day after the stock market plunged), the index showed that, while the level of transfer activity was more than four times higher than average, it still represented only a small fraction of total assets shifted less than 0.2 percent.

The survey showed investment education also is helping 401(k) plan participants make smarter choices about their investment options.

While 40 percent of respondents said they feel that the most common 401(k) investment mistake participants make is to invest their balances too conservatively, this number is down from 53 percent in the 1995 survey.

Employers are changing the ways they educate employees about 401(k) programs, with twice as many employers using one-on-one financial counseling or planning: 41 percent in 1997, vs. 21 percent in 1995. Seminars also are becoming a more common way to educate plan participants with 85 percent doing so in 1997 compared to 77 percent in 1995. In addition, 20 percent of employers are now using the Internet as a teaching tool for employees to learn more about their 401(k) plan.

With the trend toward more investment education, 54 percent of companies have attempted to measure the success of their education efforts. Companies that attempt measurement typically seek to benchmark increases in plan participation, diversification of assets, or levels of employee contributions. More than 90 percent of employers using benchmarks reported that their education efforts achieved at least one of their goals.

Hewitt Associates LLC is a management consulting firm that specializes in human resources.

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