Sunday, November 19, 2000
Internet Access Makes Saving, Trading Easier For 401-k
Internet access makes it easier for 401(k) participants
to invest and save for retirement, but it can also
lead to increased portfolio turnover (the fraction
of total portfolio value traded), according to a new
study by Hewitt Associates, in conjunction with faculty
and researchers from Harvard University and the Wharton
School of the University of Pennsylvania.
The study found that an increase in portfolio turnover
makes it critical for plan sponsors to educate participants
and discourage poor investment habits, such as market
timing, or investing based on attempts to predict future
market direction.
"The Internet is a powerful tool to help 401(k)
participants manage their retirement savings," said
Lori Lucas, defined contribution consultant, Hewitt Associates. "However,
in order to ensure sound investment behavior, it is crucial
that plan sponsors not only introduce the Internet as
a transaction tool, but also as an education and communication
tool."
The study examined the trading behavior of more than
60,000 401(k) participants at two U.S. companies that
added Internet access during a nearly 3-year time period
(approximately 18 months before Internet access was introduced
and 18 months after the Internet introduction).
Of the more than 15,000 participants who used the Internet
to make a trade during the study period, research shows
that 88 percent who made a second trade used the Internet
channel. Of that percentage, 94 percent who made a third
trade used the Internet. Subsequently, of that number,
96 percent who made a fourth trade used the Internet.
"It may take some time for participants to get
used to the idea of using the Internet to make 401(k)
transactions, but once they do, participants clearly
prefer the Internet instead of going back to the phone
to transact," said Lucas.
Research also found that average portfolio turnover
increased by more than 50 percent after the introduction
of the Internet as a trading channel, and that trading
frequency (the number of trades made by participants)
nearly doubled. For company "Alpha," projected
average annual turnover increased from 84 percent prior
to the introduction of the Internet to 121 percent after
the introduction. For company "Omega," projected
average annual turnover changed from 48 percent prior
to the Internet introduction, to 79 percent afterwards.
The projected portfolio turnover levels are consistent
with significant portfolio reallocations by the average
401(k) plan participant during the time period studied,
suggesting that participants are not simply interacting
with the plan by rebalancing their portfolios, but potentially
reacting to the market and market timing.
"One benefit of offering Internet access is that
participants become more comfortable using and interacting
with the plan," said Lucas. "At a minimum,
though, these high turnover figures suggest that the
average participant isn't 'picking and sticking' with
their 401(k) plan allocations. So, it's imperative that
plan sponsors take advantage of the Internet channel
as a tool to communicate and educate participants about
the importance of taking a long-term investment strategy
with their 401(k) savings."
As may be expected, the results also show that younger
and highly paid participants are more likely to use the
Internet for trades than their older and less-highly
paid counterparts.
For example, at Omega, a 45-year-old participant with
5 years of company tenure and plan participation, a $60,000
salary, $30,000 plan balance and a 10 percent contribution
rate has a 30.7 percent chance of trying the Internet
channel. A 30-year-old participant making $120,000 per
year with these characteristics has a 49.4 percent chance
of using the Internet.
"These results show that targeted communication
efforts may be required to make certain groups of participants
comfortable with the idea of using the Internet," said
Lucas.
While the Internet channel is beneficial for plan sponsors
and participants alike, it is imperative that ample education
and communication are provided.
"By allowing participants to manage their 401(k)
accounts through the Internet, plan sponsors are providing
participants with more control and an easy way to pay
more attention to their 401(k) assets," said Lucas. "With
sufficient investment education and communication, the
Internet can help make it easier for participants to
develop good investment habits."
Significant Increase in Online Spending
Home Internet shoppers spent an estimated $695 million
on the Internet Oct. 30 - Nov. 5, 2000, a Goldman Sachs
/ PC Data study disclosed this week. The figure represents
a 300 percent increase over a comparable time period
last year, during which online spending was estimated
at $222 million.
Online travel, food/groceries, apparel, computer hardware
and toy sites fared especially well, according to the
weekly study.
“The presumption that last year’s Holiday
season was a dress rehearsal for this year could be realized
in the next two months,” said Cameron Meierhoefer,
Internet analyst for PC Data Online. “Online consumer
spending in travel could be four times what it was last
year at this time, while online apparel spending could
be ten times what it was in 1999.”
A comparison of estimated buyers in the five top spending
categories during Oct. 30 – Nov. 5 follows (with
figures from Nov. 5 – 10, 1999 in parentheses):
Travel – 260,000 (140,000); Food/Grocery – 610,000
(99,000); Apparel – 678,000 (220,000), Computer
Hardware – 258,000 (259,000), and Toys – 449,000
(259,000).
"The 1999 Holiday season introduced online spending
to a wide, new audience, many of whom continued to shop
online throughout the year,” said Anthony Noto,
Goldman Sachs e-commerce analyst. “While transaction
activity has been relatively flat since the summer --
a period to ‘cross the chasm’ to mass-market
adoption -- purchase activity has trended up to twice
what we saw last year. The recent spending numbers suggest
that average spending and spending per person levels
also appear to be rising as well.”
