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While the percentage of 401(k) plan assets allocated to stable value funds has steadily declined in recent years, as more participants put their money into the booming stock market, that trend could reverse in the event of a major stock market correction.

But the extent to which 401(k) plan participants would abandon the stock market in favor of more conservative stable value funds and guaranteed investment contracts is a subject of considerable speculation.

One factor affecting such a shift would be plan sponsors' success at communicating to employees that despite short-term dips, participants are likely to gain higher yields over the long haul by investing in the stock market.

In addition, the majority of employees tend to stick with their original investment decisions in spite of stock market movement, benefit experts say, with a relatively small number of plan participants disproportionately responsible for movement in and out of fund options (see story, page 20).

Another key factor would be the severity and duration of any stock market correction, as well as the factors that may be driving it.

Market observers estimate the current size of the stable value market at $180 billion to $200 billion. But stable value funds' share of 401(k) plan assets has declined in recent years.

According to a recent survey by A. Foster Higgins & Co. Inc., stable value funds accounted for 33% of respondents total plan assets as of December 1995, down sharply from 42% the prior year. Among plans offering some type of equity fund, 40% of assets were invested in equities (BI, Dec. 16, 1996).

This was the first time since the survey began in 1990 that a greater percentage of participant accounts was invested in equity options than in stable value options.

Research by Windsor, Conn.-based LIMRA International, a financial services research organization, and by the Washington-based Stable Value Assn. also indicate sales of stable value products are declining.

According to the Guaranteed/Stable Value Products Sales Survey jointly conducted by the two organizations, the more than $45 billion of stable value products sold in 1995 represented a 14% decline from 1994's level.

The study concluded that factors influencing the decline were the strong equities market, low interest rates, and an increased awareness by plan sponsors and participants of the importance of diversifying retirement investments among several asset classes.

That trend continued at least through the first half of 1996, when LIMRA and the Stable Value Assn. found the sale of stable value products fell another 12%.

While Glendale, Calif.-based Nestle U.S.A. Inc. has seen a decline in the amount of 401(k) money going into its stable value investment options, it is hard to say whether it is a reflection of the company's education efforts or of the lure of the stock market, said Dave Kaiser, a vp in Solon, Ohio.

"Most of our employees, I think, have learned enough that they can't time the market," he said. "We try to get across the message that they should invest long-term and only fine-tune asset allocation, not make dramatic swings from day to day."

When the stock market had a minor correction in July, "we didn't see a lot of money move into stable value," said Mr. Kaiser. In fact, over the past few months, Nestle has seen a slow shift toward stable value funds, as participants seek to protect their recent stock market gains.

A Hewitt Associates L.L.C. study of 25 clients who permit daily movement in and out of their investment options found there was asset movement out of equity funds when the market dropped in July, and movement back in when the market recovered. At the same time, investments in stable return funds dropped once the market recovered, according to the study by the Lincolnshire, Ill.-based benefits consultant.

"We have not had any grand movement of money out of GICs," said Ed Roche, vp and managing director at NYNEX Asset Management Co. in New York. "It has not continued to grow, but in the midst of a huge market rally, it's natural for people to start chasing equity and putting more in their equity portfolios."

"We're riding a six-year bull market right now in the stock market, and as long as that boom goes on, I would expect employee investments in equities would continue to be an upward trend," said Larry Mylnechuk, president of Integra Associates Inc., a Lake Oswego, Ore.-based investment advisory firm.

"The trend away from stable value and into equity is one that has been developing over the last few years by virtue of the tremendous annual gains that the stock market has produced in the last few years," agreed Cynthia Hargadon, executive director of the Stable Value Assn.

"What we see is the encouragement of employers who have been wanting to get participants into equity as a way to build their balances and as a long-term investment strategy, and it's one that the Stable Value Assn. understands was a change that needed to happen over the years. People did need to have equity in their portfolios," she said.

The movement away from stable value to equity-oriented investments has been "pretty steady" over the past few years, "and I think that's been fine," said Brian C. Ternoey, a principal with Foster Higgins in Princeton, N.J.

"I think GICs so dominated the market for a long time, that it isn't necessarily bad for GICs. It's just that participants are becoming more familiar, comfortable with other types of investments," he said.

GICs will continue to have a significant share of the 401(k) market, Mr. Ternoey added, though "things are not quite as rosy as they used to be for GIC salespeople."

But some benefit experts and consultants warn that now may not be the best time for 401(k) participants to be shifting their assets into the stock market.

"It's better for them to move in when returns on the stock market are down," said Bruce Vane, senior vp at San Francisco-based Certus Asset Advisers, a fixed-income investment adviser. But "I think that the majority of plan participants don't view their 401(k) plans on a long-term basis. They're more short-term oriented," he added.

Ms. Hargadon of the Stable Value Assn. said she also is concerned about market timing. The move toward equities "has possibly put individuals into perhaps a riskier investment strategy than they can handle long-term, because the equity market has pretty much masked a lot of the volatility it is capable of over the last eight to 10 years. It's been a remarkably quiet time in terms of volatility. Volatility isn't measured by (the stock market) going up all the time," Ms. Hargadon said.

The magnitude of any stock market correction will be a critical factor in determining how many participants move out of equities and back to stable value funds.

"If there's more of a leveling off, I would expect it not to have an immediate effect on employee investments and investment patterns, but if there's anything of a major correction, then I could see money flowing out of equity options," said Mr. Mylnechuk.

"If there is a major correction in the stock market, I would expect to see very large transfers into stable value," agreed consultant Murray Becker of Becker & Rooney, a Fort Lee, N.J.-based division of Kwasha Lipton L.L.C.

Employees who have put 401(k) money into equities have done so well that they are now a little afraid of losing a large part of it, so at the first sign of correction, they will try to lock in their gains with stable value investments, predicted Mr. Becker.

If the market's correction is enormous, there will be an even more fundamental change away from equity investments, with some people deciding that dealing with investment risk "is not as much fun as they thought," he added.

"I would say that if there's a dramatic move in one or two days that we probably wouldn't see an enormous movement of money into the stable fund," said Nestle's Mr. Kaiser.

However, "I would tend to believe that if we see the economy start to deteriorate more gradually and have bad news over a span of months and months and months and see the market decline and decline, then we would see money moving on a fairly regular basis into the stable funds," he said.

"The difference between the two scenarios is our employees know if there's a dramatic correction that it's probably too late to capitalize on that movement in the stable fund, whereas if it's a gradual correction, they might gradually start moving more and more money into that direction," Mr. Kaiser said.

To have an impact on the shift of funds, the correction "would have to be sustained," agreed John Milberg, vp at Newport Beach, Calif.-based Pacific Mutual Life Insurance Co., which provides stable value products.

"I think if the stock market falls off over a week and then comes back a little bit," there would not be a reaction, he said. Plan participants "are educated to the point where they'd have to see a sustained correction" to react and move their money, he added.

The bond market could be a portent for how 401(k) plan participants react, suggested Wayne Gates, general director at stable value provider John Hancock Financial Services Inc. in Boston. He said a study he conducted of the bond market over the past five years, which unlike the stock market has had consecutive down months, found there were outflows from bond mutual funds in months that bonds performed poorly. "You did see a pattern there," he said.

Despite employers' investment education efforts, "participants tend, unfortunately, to chase returns," said Peter E. Bowles, president and chief investment officer at Woodbury, Conn.-based Fiduciary Capital Management, a stable value investment manager.

"My only hope is that the inevitable correction, which I'm sure will occur, is not so traumatic that people bail out to the same extent as they've been flocking into stocks, because if they do, they'll be locking their losses in, obviously," he said.