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401(k) Investors May Be Missing the Stock Market's Record Performance

By Hal M. Bundrick

NEW YORK ( MainStreet) Did you miss last year's stock market super rally? And are you bound to miss the next surge in stocks? By all standards, the stock market overachieved in 2013 with massive double-digit returns -- in fact, the S&P 500 had its best performance since 1997, notching a nearly 30% profit. The NASDAQ rocketed up 38%.

America's economic recovery is taking root, and investors are feeling good about recent returns and optimistic about the future. But 401(k) investors may be missing the bull run.

Many plan participants are concerned with losing their retirement savings and are becoming increasingly conservative in their investment choices. A survey of U.S. workplace retirement plan participants fielded by State Street Global Advisors reports that a great number of workers are moving their assets to fixed income investments just as the risk of rising interest rates could have a negative effect on bond values.

Nearly 80% of respondents who invested during the market downturn said they are contributing as much -- or more -- now than they did five years ago. Investors have learned an important lesson about the cyclical nature of the markets. More than three-quarters (76%) say their 401(k) is in the same or better shape, than five years ago.

But all this good news and optimism is curbed with contrary behavior.

While 78% of 401(k) plan participants think that the market will be in the same or better shape in five years than it is today, nearly half (49%) are currently investing more conservatively than they did five years ago.

"Participants are afraid of losing their retirement savings and are shying away from making more aggressive allocations," says Fredrik Axsater, senior managing director and global head of defined contribution, SSgA. "This is particularly concerning for younger investors who may not understand how a conservative approach can limit the growth needed to fund retirement."

An impressive 79% of investors have maintained or increased their contribution levels since the financial crisis, which could fuel larger returns. But at the same time participants are dialing down the risk in their portfolios by adding larger percentages of fixed income investments.

More than a third of participants said that bonds help minimize the impact of inflation, when in fact bond returns are highly vulnerable to inflation increases.

State Street is urging plan sponsors to take advantage of market optimism and encourage participants to continue saving more but also to develop communications campaigns focused on bonds to help alleviate any misunderstandings investors may have about the conservative investment options available.

Employers are also encouraged to assess portfolios and identify participants who have investments out of line with the age-appropriate allocations. Plan sponsors should also build stronger core offerings and ensure that the plan menu is simple and easy to understand. Employers should also ask investors to consider target date funds that help participants transition their accumulated savings to a retirement income focus.