Fear and loathing of lost wages and dramatically depressed stock prices have young investors losing sight of their retirement goals.

Building a nest egg is not something most 25-year-olds are giving much thought to these days when faced with evaluating their personal finances. Typically, they tend to focus on making sure the rent and student loan bills have been paid on time and how much will be left to cover their weekend tab at the local saloon. And with a three-year bear market for stocks already in the books, many of them are wondering if it is safe to put a portion of their paycheck into a defined contribution plan such as their company's 401(k).

Studies have shown that the 20-something age group consistently makes up the smallest demographic of 401(k) plan participants. Of workers aged 20 to 29, 57.8% participated in their 401(k) plan in 2001, according to Hewitt Associates. By comparison, 83% of those aged 50 to 59 participated in a 401(k). But the numbers have slipped even further in recent years as market jitters have kept newcomers on the sidelines. The risk of losing one's shirt on an equity investment or being sent packing to the unemployment line is a very real scenario given the bearish backdrop.

Certainly, that is a good enough reason for people to be concerned about investing, but it does not justify ignoring retirement savings, according to David Wray, president of Profit Sharing/401k Council of America, a Chicago-based investor advocacy group. He says that the biggest misconception that exists in the collective consciousness is that 401(k) and equity investing are synonymous, calling it a fabrication of the media. In reality, it's really more about salary reduction, savings and a tax benefit.

Being uncomfortable with equity investing is fine, but it shouldn't prevent people from contributing to 401(k)s, said Wray. In an attempt to address the level of discomfort among young investors, a significant number of companies are offering a professionally managed option. That means the investor delegates the asset allocation decision to a third party selected by the company. The way most of these third-party advisors operate is that they recognize the investor's age and allocate their money accordingly. Then it is automatically rebalanced periodically going forward, starting with an aggressive approach while at a young age and gradually becoming more conservative as investors get older.

With Baby Boomers gearing up for retirement, there are also concerns that there will be a drawdown in capital once retirement takes place. But Wray disagrees, saying that we are at least 20 years away from a drawdown. "People are looking at the potential accumulations as if people are going to just turn all that money into gold bars and put them in their back yard," he said. "That is not going to happen." Wray says that the money will stay invested one way or another even if investors move their retirement savings into annuities. Insurance companies would then pick up the slack by buying equities.

Despite the stock market's woes, however, Wray strongly suggests that younger investors be heavily weighted in equities, particularly right now. He believes that 25-year olds should "put the pedal to the metal" and go for it because they have a 40-year time horizon and there are plenty of stocks with attractive valuations out there. But if they are still feeling skittish about stocks, another alternative is investing in a stable value 401(k) plan. That consists of high-grade fixed income, asset-backed and mortgage-backed securities, with a strategy designed to minimize volatility and maintain a stable net asset value. The attraction of these types of investments is that there is no principal risk at all.

Perhaps the biggest reason for contributing to an employee 401(k) plan, he said, is that the U.S. economy is a well-oiled machine, one that has experienced 200 years of strong growth and will continue that pattern for another 200 years. Provided they have the right mindset, young investors are better off being in a plan than not being in a plan. A lot of young people entered 401(k)s in the mid 1990's with the mistaken understanding that they could retire when they were 40 years old.

The right way of viewing 401(k)s is "grinding it out and taking reasonable returns over a very long period," Wray said. Essentially, the longer an investor waits to begin contributing to their 401(k), the shorter their window of opportunity, he said.

Back to Basics

In order to address the problem of declining participation among young investors, some of the biggest 401(k) providers are reminding them about the fundamentals of retirement savings. "One of the things we're doing is getting back to the basics of sound long-term investing," said Kathryn Hopkins, executive vice president at Fidelity Institutional Retirement Services Co. (FIRSCo) in Boston. Hopkins stressed the importance of getting started at an early age, taking advantage of company match programs and implementing an appropriate asset allocation strategy.

An example of how Fidelity employs that strategy is leveraging new technology to make 401(k) investing a more personalized process. Back in January, the firm launched a personalized employee education program to serve an estimated 14 million workers nationwide. The program, called first/Person, is designed to improve the caliber of education and ensure an increase in employee involvement. It enables Fidelity to tailor its communication with each employee according to their specific needs and attributes.

The key to any successful education program, particularly geared towards the younger generation, is recognizing where that employee is in relation to their employment cycle, Hopkins said.

By personalizing their communication with investors, Fidelity is able to serve up information about the specific individual and provide them with concrete action steps to make investment decisions that will improve where they are.

"When you show someone very personalized data, they are 400% more likely to take action," she said.

Copyright 2003 Thomson Media Inc. All Rights Reserved.

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