The new Pension Reform Act, known on the street as the 401K law, will obviously cause major downward pressures on manufacturing and airline stocks which will need to divert signifiant resources into their pensions over the next 7 years or more to meet the new requirements. The law will also be a major lift to firms like Fidelity and Vanguard who offer 401K services (however both companies are privately held, so there’s no equity investment opportunity to be had there). The real question is: will the rise in 401K contributions be a major contributor to a future stock market rally?

Current 401K participation is around 65%. Many reports that I read and heard soon after the passage of the new Pension Reform Act state that the goal of this act is to raise 401K participation to over 90% of the workforce. Additionally, with manufacturing, airline and other pension companies potentially contributing billions more into their pensions over the next few years, this will serve as another source of cash flowing into the system. I believe the large caps will benefit most from the rise in 401K and pension contributions due to the market-cap weighted options in most 401K plans. There also could be a significant boost in the bond market purchases due to the increase in 401K contributions, thus raising the price of bonds and lowering the yields.

401Ks emphasize the big and generic options in the market much more since most 401K plans offer very few options, and those that are offered are “safe” options. Even when 401Ks offer a wide range of options such as small-cap and micro-cap funds, many people will not purchase these options due to lack of familiarity or understanding. With the current investing guidance offerred to the general public, I see major emphasis on large cap and bonds coming down the pike.