| Sargent & Lundy Savings Investment Plan |
| ROADKILL ON THE RETIREMENT HIGHWAY |
| The following excerpts are from an article in the Friday,
July 24, 1998 "Wall Street Journal". The opinions of the author,
Ellen E. Schultz, may or may not reflect those of the SIP Committee.
It is very likely that more people can tell you which eight states border Tennessee than can tell you what the returns on their 401(k) portfolios were last year. In fact, if you asked 50 employees how well they did in their 401(k) or profit-sharing plan, the typical answer would be "pretty good." In fact, one guy boasted in an interview that he'd "made a killing" in his 401(k). He claimed he had a 40% return. But he was counting his contributions. When his own savings were subtracted, he'd achieved only a pantywaist return of 5% or so. This isn't an unusual situation. Even if people don't mistake their savings for earnings, they may think they were more successful investors than they actually were. Sure, they know how well the funds in their retirement plans performed, but they've arrayed their savings among several funds, and are contributing weekly, and moving money around. So their actual returns are anyone's guess. Employers and the 401(k) industry aren't overly eager to figure out how badly employees are flunking the 401(k) investment challenge. But one company was brave enough to take a look. At The Wall Street Journal's request, York & Associates, a high-tech firm in Minneapolis, put its 42 employees' 401(k) portfolios under a microscope. You'd expect these employees to do better than most: They're highly educated, have received good investing materials and seminars and have an excellent selection of investments, which include stock funds, bond funds and several funds-of-funds. (These are funds that invest in a basket of other funds. The purpose is to provide instant diversification and asset allocation.) Still, fully half the employees didn't do as well as they would have if they had simply chosen a plain-vanilla funds-of-funds. One fellow playing investment roulette put all his money into a single stock fund, PBHG Growth, which was down 3.4% last year. So much for the lecture on diversification and asset allocation. The mediocre performs made the mistake of putting too much money into bond funds and money-market funds, or didn't diversify their stock funds enough. If their portfolios consisted of one stock fund and one bond fund (a magic formula used by many employees) they did poorly if the one stock fund they chose was a loser that year. If they had chosen one of the funds-of-funds, they'd have done dandy. Brooks Hamilton doesn't think people should be winging it like that. His Dallas firm, Brooks Hamilton & Associates, handles the operations of large 401(k) plans, and from that vantage point, he can see that many employees have the investing acumen of raccoons. And he's worried they'll become roadkill on the retirement highway. To see what the future will bring, Mr. Hamilton, an actuary and pension attorney, took one 401(k) plan and computed the actual 1997 portfolio returns for each of the 6,000 participants. That is, for each employee, he took the funds they were in, the percentage of money in each, and accounted for the varying amounts invested each week. He then sorted the results by yields, and projected how well each employee would fare in retirement (he assumed standard wage increases, and historical rates of inflation and market returns). The results: The top quintile would retire with 100% to 110% of pre-retirement pay, while the lowest quintile would retire with only 10% to 15% of pre-retirement pay. "These people are going to retire and be a burden to their children," Mr. Hamilton says. Not surprisingly, employees with lowest portfolio returns were largely the lower earners, and those with the top returns were the top earners. But there was some overlap among income levels. So what should you do about it? * A pretty good solution for the investing-impaired are funds-of- funds. These funds will give you one-stop-shopping asset allocation. An advantage of the amateur investor is that funds-of-funds maintain an asset-allocation balance automatically. If the market moves significantly, you don't have to sell some of the fund, or redirect your savings, to achieve the asset-allocation mix you're shooting for. * As a rough rule of thumb, try to achieve a 10% return annually, says Mr. Hamilton. He urges people to diversify among stock funds, and avoid loading up on bond funds. If people achieve a 6% annual return instead of 10%, they've cut their retirement next egg in half. |
This page updated on 7/28/98