401(k) Investment Trends Report: Investment preferences are shifting as new plan designs proliferate.

What investments are luring 401(k) managers and participants? Equities are hot, but are they smart? As recently as May 10, the Dow rallied to highs last seen during the tech bubble, before hitting a severe air pocket. Are participants just chasing a trend - and risking a new wipeout?

Though participants still face financial risks, new insights into investment behavior have led to smarter plan designs - and smarter investment options. "The offerings within plans have improved in terms of both diversification and simplification," says Dominic Falaschetti, CFA, 401(k) senior consultant at Ibbotson Associates.

The shift in investment thinking comes from the realization by plan sponsors that, as defined contribution plans have now inarguably displaced defined benefit plans as the retirement vehicle of the future, participants need more help than ever. And unlike the go-go 90s, employees also are now vocal in their desire for investment guidance.

"The overall shift is to make DC more like DB," says John Doyle, vice president of marketing and communications at T. Rowe Price. Doyle points to auto-enrollment, default options and most notably, a new stress on managed options, such as lifecycle funds and managed accounts, that accomplish this goal. With plan sponsors focused on improving the long-term decisions of their participants, new investment options are attracting buzz as well as participants' assets.

Current asset allocation

Participants still don't save much for their retirement. Research by the Investment Company Institute shows the average 401(k) balance in 2004 was $56,878, up from $51,569…