Sector, Specialty Funds are Cropping Up in 401(k) Plans

Change is a bit slower to come in the 401(k) marketplace than in the mutual fund industry as a whole. But change is coming, nonetheless, in terms of new investment choices for 401(k) plan participants.

To be sure, you’re not likely to see a “concentrated” Internet fund in your company-sponsored 401(k) any time soon. However, many 401(k) plans are allowing plan participants to be much more aggressive with their retirement money than in years past.

For instance, “we’re seeing many traditional 401(k) plans offer more sector funds,” says Molly Cisneros, spokeswoman for the Invesco family of funds in Denver. In fact, the reason Invesco launched an institutional share class of its popular technology sector fund a little more than a year ago was to service 401(k) plans--specifically a plan run for Boeing employees.

Invesco officials say demand is rising in the 401(k) marketplace for telecommunications and health-care funds as well.

Nationwide, approximately 10% of plans now offer some form of sector or specialty fund, according to a recent survey by Hewitt Associates, an employee-benefits consulting firm. So few plans offered these options in the past that Hewitt did not even survey plan sponsors for this information until last year.

Approximately 12% of all plans now offer participants access to an emerging markets stock fund--up from 4% in 1995. About a third now offer at least one foreign fund, versus 10% in 1995.

Other changes are also increasing 401(k) flexibility. For instance, 7% of plans now provide a so-called brokerage window--access to an account with a discount broker through which plan participants can use their retirement savings to invest in thousands of stocks and hundreds of mutual funds or hybrid investment products. In 1995, fewer than 1% offered this feature. (Brokerage commission rates would apply to such transactions.)

Among large companies--those with 5,000 employees or more--approximately 10% now offer a brokerage window in their 401(k) plans, according to the Profit Sharing/401(k) Council of America, based in Chicago. That’s up from none five years ago.

“These large companies are the real trendsetters,” says David Wray, the organization’s president. “They legitimize certain practices.”

But conservative investors needn’t worry: New funds and other investment options aren’t forcing traditional diversified funds out of 401(k) plans.

It’s all about having more choices: Two years ago, the average 401(k) plan offered around eight investment choices. Today, it’s closer to 11, the Hewitt survey shows. And about a quarter of all plans offer employees more than 11 choices.