HUNTINGTON BEACH, Calif. - Despite the recent daily thousand-point swings in the Dow Jones Industrial Average and the understandable uncertainty among investors, Individual Retirement Accounts and 401(k) plans still remain American's dominant and trusted retirement vehicles.

That trend is expected to continue as retirement plans automatically enroll participants into qualified default investment alternatives like target-date funds, and investors continue to buy into the notion of the rewards of long-term holdings.

But that doesn't mean that mutual funds have not been put to the test. Call volumes have shot through the roof at fund shops and adviser groups, up as much as 400% at some places during particularly turbulent days. Mutual fund websites have also been flooded with activity.

"There were a number of instances where the participant logged on many times, created trades and then canceled them, almost like day trading," despite the fact that mutual funds are traded at the end of the day, said Andrew Oliphant, director of consulting at client services for The Newport Group, speaking at the Investment Company Institute's 2008 Operations & Technology Conference.

So far, the most important job for advisers and call center reps has been talking investors down off the ledge, convincing them to stay invested for the long term, and repeating the age-old mantra of "time in the market, not timing the market."

"History has shown that it's generally not a good idea to get out of the market when everyone else is panicking," said Mendel Melzer, chief investment officer and president of Newport Group Securities Inc., recalling Warren Buffett's advice to "be fearful when others are greedy, and be greedy when others are fearful."

Melzer said his consultants have to remind investors about their risk tolerance and investment time horizon, and that while equities have short-term volatility that can result in losses, over the long term, they have superior returns.

"If you aren't comfortable with that risk, you shouldn't be in equities," he said. "Because stocks have fallen 30% to 35% from this time last year, there is actually less risk than there was a year ago when prices were high. Prospective returns on equities are actually better at these levels."

Melzer said most clients appreciate this advice and only a very small minority change to something more conservative. None of Newport's clients have cashed out of their 401(k)s since the crisis began, he said, adding that cashing out of a 401(k) plan is a very drastic move and incurs severe tax liabilities.

"There has been a lot of focus in Washington on making 401(k)s the dominant retirement vehicle," said Cynthia Hayes, managing partner of Oculus Partners LLC and a former managing director of Merrill Lynch Retirement Group.

When 401(k)s were created, they were never intended to be a be-all, end-all solution to retirement planning, but as more companies dumped their costly defined-benefit pension plans in favor of the cheaper, defined-contribution plans, regulators became obligated to boost oversight, transparency and disclosure rules.

"There are a lot of Boomers with their retirements still before them," Hayes said. "Sponsors and consultants are demanding lower-cost investments. The new mission is to get fees as low as possible."

Investors who are brave enough to open their 401(k) statements these days gasp at their quarterly and yearly losses before their eyes quickly move to the fee column.

"There is a high level of anger, with a lot of people asking, 'Who did this to me and why?'" Hayes said.

Investors want to be able to understand their fees and how or if they're making up for the fees with profits, she said. When profits are up and everything is making money, fees are less of a concern, but all that changes during a bear market.

"Costs are really being scrutinized," Oliphant said. "Education is paramount. It has to be available and understood, but it will always come at some sort of cost."

Call centers and experienced financial advisers with the appropriate licenses and certifications are needed and cost money, but the fees for these services can be hard to separate from other fees.

A surge of outsourcing to third-party providers during the last boom created an army of middlemen whose purpose was opaque, but when the gravy train ended, so did most of those positions.

"Sometimes we were dealing with two to three levels of intermediaries," Hayes said. "Many people were wondering if revenue-sharing agreements were made public, what would that do to [these relationships]?"

The Department of Labor and the Internal Revenue Service have made major changes to Schedule C of Form 5500, specifying service provider information such as their names, gross salaries, fees and commissions, the nature of services provided and the relationship to the employer or interested party.

"The rules are relatively complex," Oliphant said. "Information must be in writing and disclosed prior to engaging in a contract. If a fee is not disclosed, it is a prohibitive transaction."

Oliphant said he expects the trend toward outsourcing to continue, but plan participants will want a known provider and companies will want their third-party provider to provide all the services in-house, not outsource further.

"401(k) participants are still putting money into plans," said Rochelle Antoniewicz, a senior economist at the Investment Company Institute. "Lifecycle mutual fund assets are up 62% since 2006, and way up from 1998. They are a significant driver of growth in the industry."

Participants are also embracing balanced funds, she said, and 43% of recently hired participants with balanced funds as a selected investment option have 90% or more of their assets in such funds.

Much of this growth can be attributed to the increasing use of these funds as default options for auto enrollment, she said.

In addition to fees, regulators may want to look at extending the age at which retirees are forced to begin taking money out of their IRAs or 401(k)s, currently at age 70-1/2. People are living longer and may need their savings to last decades longer than expected. Experts say retirees should also have the option to postpone making withdrawals during down markets to help preserve their assets.

"The bulk of 401(k) assets are held by older participants," Antoniewicz said. "As of 2004, a quarter of all IRA assets were held by individuals who were required to take minimum distributions."

"Just because someone retires doesn't mean they will liquidate all of their assets on the day they retire," she said.

(c) 2008 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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