Access Research estimated that the assets of 401(k) accounts had a total 1996 value of $675 billion (Barneby). The Investment Company Institute, the trade association of the mutual fund industry, has separately estimated this value to be $857 billion (Reid and Crumrine). The average account balance in 1996 was reported to be $32,000, with over 1.9 million individual accounts of $100,000 or more (Barneby). How are these funds invested?

This distribution may not be an absolute indication of employee preferences among these investment options, because not all plans contain all of these investment choices. For example, in 1995, 95 percent of DC plans contained an equity mutual fund option while only 59% contained a stable value account option (Foster Higgins, 1996).

MUTUAL FUNDS

I n a mutual fund. contributions to the plan are used to purchase mutual fund shares on the same basis as an individual investor would buy the fund shares. These mutual funds may be retail funds, available to the general public and whose prices are quoted daily in the financial press or institutional mutual funds, available to a limited set of investors.

Mutual funds are pools of financial instruments that may include stocks, bonds, commercial paper, cash, and other instruments. Shares of mutual funds are bought by investors, including 401(k) plans. The shares represent an undivided common interest in the pool of investments. The share holders benefit by receiving the earnings of the investments in the form of additional shares and by a capital gain when the shares are redeemed from the mutual fund.

In 1996, for the first time, mutual funds became the largest segment of assets held in 401(k) plans, constituting just over 40% of asset value (Foster Higgins). However, for several years the inflow of funds to mutual funds had been greater than to other investment options. The shift of investment by 401(k) plans into mutual funds has been dramatic, increasing from 5% of assets in 1990 to 40% in 1996 (Reid & Crumrine).

Retail Mutual Funds

Mutual funds are marketed to a wide spectrum of investors including individuals. Mutual funds may be categorized by the type of underlying security — equity, bond, or mixed — and by the investment objective. Investment objectives are often expressed, at least in part, in the terms of the risk-return considerations. The following table illustrates the range of retail mutual funds that are likely to be found in typical 401(k) plans (Sheets, 1996).

Table II-4

Typical Mutual Fund Categories