A client of Beth Gamel's recently started putting money in hi company's 401(k) retirement plan.
He put it all in Magellan -- Fidelity's large, successful but often volatile growth stock fund. Why? "That was the only fund he'd ever heard of," she said.
Ms. Gamel, a financial planner in Lexington, Mass., has heard people give worse reasons for the investment choices in their 401(k) plans. The most common, she said, is that some people don't want to lose any money -- ever -- in their retirement account. So they put it all in some kind of "guaranteed" fund, like a guaranteed income certificate, or a money-market fund. People do this despite the fact that, over the long term, equity funds have a better record at beating inflation.
One reason people don't make better choices is that the advantages of equity, or stock funds, are not fully explained, said Stephen Janachowski, a partner with Brouwer & Janachowski, a San Francisco investment advisory firm.
"My experience is that most of the money in 401(k)s goes into GICs or money-market accounts," Mr. Janachowski said. "I don't think companies do enough to give their employees the information they need on risks and return."
Another reason for the lack of information, Ms. Gamel said, is that employers want to avoid risk.
"It is a long educational process," agreed Martin Whitney, vice president of Benetech Inc., a benefits consulting firm in Wellesley, Mass. "You have to sell people on the idea that with 30 years to go they shouldn't be putting their money in fixed-income investments."
Still, many younger people aren't comfortable with the stock market. Maybe their parents or grandparents lived through the Depression and told tales of losing money on Wall Street. Or they heard about all the money that was lost in the October 1987 market crash but didn't take notice of the next year's recovery.
For them, Mr. Janachowski suggested a small step into equity funds. Most 401(k) plans have at least one conservatively managed stock fund, perhaps an equity-income fund that
invests in companies with long records of paying dividends. The Afirst-time investor could put 20 percent to 25 percent of the 401 (k) allocation into a conservative fund and see what happens for a few years.
Growth funds invest in smaller companies and businesses whose future prospects may be brighter than their present earnings. These might seem too risky for a retirement portfolio, but it could be just the place for your money, especially if you're 20 or 30 years from retirement and have time to ride out fluctuations.