More 401(k)s Have Brokerage Option

NEW YORK (AP) â€” Company 401(k) plans traditionally have allowed participants to pick investments from a limited list of mutual funds. <br><br>But plan sponsors increasingly are adding what's known

Thursday, August 17th 2000, 12:00 am

By: News On 6

NEW YORK (AP) â€” Company 401(k) plans traditionally have allowed participants to pick investments from a limited list of mutual funds.

But plan sponsors increasingly are adding what's known as a ``self-directed brokerage option'' that lets workers use some of their retirement savings to buy stocks or to invest in mutual funds that aren't on the sponsor's core list.

A recent study by Cerulli Associates Inc., a Boston-based research firm, found that about 15 percent of 401(k) plans now include a brokerage option, according to Cerulli consultant Joshua D. Dietch. Just 4 percent of 401(k) assets currently are invested via these options, he said, but that figure is expected to increase.

Under a self-directed option, plan participants can buy and sell securities as they please. So does this mean a lot of Americans soon will be day trading their retirement funds?

Experts doubt many investors will take that route.

For one thing, most people tend to be relatively conservative in investing their retirement savings, basically following a buy-and-hold strategy that financial planners have long advised is the best way to maximize the return on savings.

For another, many companies that allow stock trading in 401(k) accounts do impose limits, for example capping the assets that can be put into the market at 20 percent or specifying a maximum monthly dollar amount, said Virginia Karablacas, division manager for the Wilmington Trust Co.'s employee benefits group.

In addition, going into the stock market means paying brokerage fees and investing time, notes Dallas L. Salisbury, president of the Employee Benefit Research Institute in Washington, D.C.

``The moment you move into individual securities, you have to be willing to spend your personal time monitoring your portfolio, keeping track of the news,'' he said. ``If you only hold five stocks and one goes through the floor, you're in trouble.''

He said that a brokerage option has been available to the 50 employees at EBRI for the last two years and that just one worker has taken advantage of it.

Still, Walt Bettinger, senior vice president for retirement plan services at Charles Schwab Corp., the San Francisco-based discount brokerage firm, says the demand for self-directed brokerage options is growing, not only in company-sponsored 401(k) accounts, but also in 403(b) plans for workers in nonprofit organizations.

Three quarters of the new plans Schwab has handled this year include brokerage options, and assets in self-directed brokerage accounts have risen 140 percent in the past year to $5 billion, he said.

``I believe it is part of the overall trend toward participant empowerment,'' Bettinger said. ``The population is becoming more sophisticated about investing ... and wants more tools.''

Some people, he said, want to invest more aggressively than they can in regular 401(k) plans, while others want more variety in their investments.

He predicted that brokerage options ``within five years will be standard throughout the entire industry.''

Paul Heller, head of The Vanguard Group's defined-contribution business, said more than half of the 2.5 million people whose 401(k) plans are managed by Vanguard invest in just one or two mutual funds, while 80 percent have four or fewer funds.

The vast majority, he said, never change their fund allocations, while less than 1 percent of participants are responsible for half of all the money that does move around.

``The real issue here is balancing the desire of this small, but important, group of participants that wants unlimited (investment) choice and the confusion you could create among the majority of participants that's happy with their basic asset allocation,'' Heller said.