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Study: 401(k) investors seek more balanced portfolios

By Journal Staff


Participants in 401(k) plans are using balanced approach in their portfolios rather than completely shunning stocks to avoid the turmoil of up-and-down markets, according to a recent national report.

The report, released jointly by the Employee Benefit Research Institute (EBRI) and Investment Company Institute (ICI) in December, defined equities as including equity funds, company stock, and the equity portion of balanced funds.

The average 401(k) account has moved away from a high concentration of stocks, according to the report. In 2010, 40 percent of 401(k) participants invested between 80 percent and 100 percent of their accounts in equities. That is down from 2000, when 54.1 percent of participants invested with those high-equity concentrations.

Meanwhile, the portion of 401(k) participants with no stocks in their portfolios also declined. The report found 11.8 percent of participants had no equity investments in 2011 — down from 12.7 percent in 2000.

EBRI and ICI developed the report, titled “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2010” using a database of 23.4 million 401(k) plan participants. Those participants were in 64,455 employer-sponsored plans holding a total of $1.4 trillion in assets. 

The database included information provided by a range of record keepers and covers plans of various sizes with a variety of investment options. Database records were encrypted to conceal employers’ and employees’ identities.

EBRI is a Washington, D.C.–based not-for-profit organization focusing on economic security and employee benefits. ICI, which is also based in Washington, D.C., is a national association of U.S. investment companies that includes mutual funds, closed-end funds, unit-investment trusts, and exchange-traded funds.

The organizations reported that 401(k) participants are relying heavily on target-date funds. Those funds are designed to rebalance over time, changing focus from growth to income as a target date — usually coinciding with one’s expected retirement date — approaches.

Target-date funds were offered in about 70 percent of plans at the end of 2010, according to EBRI and ICI. And 53 percent of workers who were offered target-date funds held them at the end of 2010. 

But the funds’ popularity may not be the result of employees’ active choices, according to Jack VanDerhei, EBRI research director and an author of the report. 

“I think the plan-design aspect of this has more of an influence on what you’re seeing than anything else,” he says in a telephone interview. “And by plan design I mean what the sponsor is choosing for a default investment.”

Many employers chose target-date funds as a default investment for employees being automatically enrolled in 401(k) plans in the second half of the decade, VanDerhei says. And a large number of employees simply leave the money in those funds, he adds.

“There’s a very high probability that the investments they’re in, especially if it’s a target-date fund, they’re in them because the employer put them there,” VanDerhei says.

Recently hired workers in their 20s with 401(k) plans — who are likely to be automatically enrolled in those plans — leaned
heavily on target-date funds, the report found. Among such workers, target-date funds made up 35 percent of overall account balances. That is up from 31 percent in 2009 and 16 percent in 2006.

The report also found that young 401(k) participants demonstrated a high commitment to stocks. In 2010, 60.4 percent of plan participants in their 20s had more than 80 percent of their accounts in equities, up from 55.3 percent in 2000.

Target-date funds could explain that commitment, VanDerhei says. The funds would be more aggressive for younger workers, meaning they would likely rely heavily on stocks, he says.


Other findings

The survey found that 401(k) account holders also strayed away from company stock. The share of accounts invested in company stock slipped to 8 percent in 2010, down from 19 percent in 1999.

“After Enron in the early 2000s, I think a lot of employees finally figured out what the word ‘diversification’ means,” VanDerhei says. “A lot of employers also stopped forcing the employer match into company stock.” 

In addition, the EBRI report found that a steady portion of 401(k) participants had loans outstanding against their 401(k) accounts at the end of the decade. In 2010, 21 percent of participants eligible for loans had outstanding loans. That portion was also 21 percent in 2009, and it was 18 percent at the end of 2008.

But participants’ 401(k) loan balances took a slight dip in 2010. On average, outstanding loans equaled 14 percent of remaining account balances at the end of 2010. Outstanding loans amounted to 15 percent of remaining balances at the end of 2009 and 16 percent in 2008.       

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