Financial Engines Issues National 401 Evaluation: How Well Are Americans Handling Their 401s?

Business Wire,  May 12, 2008  

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Study of Nearly One Million 401(k) Portfolios Shows Lower Paid, Older Employees Making the Most Costly Mistakes

PALO ALTO, Calif. -- Financial Engines, a leading provider of independent investment advice and managed accounts, today released The Financial Engines National 401(k) Evaluation, a new report that assesses nearly one million 401(k) participant portfolios (964,118) to determine how well Americans are handling their 401(k) plans. The report also estimates the costs associated with common investing mistakes. According to the National 401(k) Evaluation, 69 percent of participants in the study have 401(k) portfolios with inappropriate risk and/or diversification, 36 percent hold high concentrations of company stock, and 33 percent fail to contribute enough to receive the full company match. While groups of participants are taking full advantage of their 401(k) plans, participants with lower salaries, lower plan balances, and those closer to retirement tend to make the most costly mistakes.

"Millions of Americans will rely on their 401(k)s as a primary source of income in retirement, and until now, it's been challenging for plan sponsors to determine which participant groups are doing well and which groups need the most help," explained Jeff Maggioncalda, president and CEO of Financial Engines. "Throughout this report, the data show that those who need the 401(k) the most are benefiting from it the least. It is our hope that 401(k) plan sponsors and providers will use this data to inform plan design, ensuring that the 401(k) works well for all employees."

Older Participants More Likely to Have High Company Stock Concentrations

According to the report, 36 percent of participants in plans with company stock as an investment option hold more than 20 percent of their portfolios in unrestricted company stock. Eleven percent hold between 10-20 percent in company stock, and 53 percent hold less than 10 percent of their portfolios in unrestricted company stock.

In general, the older the participant, the more company stock they are likely to hold. Forty-three percent of those over age 60 hold more than 20 percent of their 401(k) portfolios in company stock, compared to only 28 percent of those under age 30. Extreme company stock concentrations follow a similar trend, with 25 percent of participants over age 60 holding portfolios with 50 percent or more invested in company stock, compared to just 13 percent of those under age 30. Fifteen percent of participants over age 60 hold 80 percent or more of their portfolios in company stock.

Holding high company stock concentrations has a negative impact on the expected growth of a portfolio, according to the report. Portfolios with more than 20 percent in company stock could expect an average of 18 percent less projected retirement wealth after 20 years, compared to those holding less than 10 percent in company stock (given the same starting balance and assuming no future contributions).1 In addition, portfolios holding 80 percent or more company stock can expect an average of 42 percent less projected retirement wealth after 20 years than those holding less than 20 percent in company stock (given the same staring balance and assuming no future contributions).2

"Despite recent company collapses and market volatility, many Americans still discount or underestimate the high risk levels associated with holding high concentrations of company stock," explained Maggioncalda. "Unfortunately, the older employees holding the highest amounts of company stock have the least amount of time to recover if their company's stock happens to take a hit. Many participants don't realize that holding large amounts of company stock is actually a drag on the long-term growth of their portfolios."

Lowest Salaried Participants Making the Worst Investing Mistakes

While company stock is often a factor in participants not having appropriately diversified portfolios, participants are making other investing mistakes that are costing them projected retirement wealth. Of the 69 percent of participants in the report with inappropriate risk or inefficient portfolios, 38 percent have very risk-inappropriate or very inefficient portfolios. Just over thirty percent have portfolios that are both risk-appropriate and efficient.

Participants earning the lowest salaries are the most likely to make investing mistakes. More than half (53 percent) of participants with annual salaries below $25,000 have portfolios with very inappropriate risk and/or diversification, compared to 33 percent of those earning more than $100,000 per year. Common reasons for inappropriate risk or diversification include high money market or stable value concentrations, age-inappropriate portfolios (i.e. too conservative for younger employees or too aggressive for older employees) or concentrations in a single asset class.

Investing mistakes may cost participants real money in retirement. According to the report, portfolios with very inappropriate risk and diversification could expect to have 22 percent less projected retirement wealth after 20 years, compared to those with appropriate risk and diversification (given the same starting balance and assuming no future contributions).